Water price ceilings create distorted price incentives

A Water Shortage During Brazil’s World Cup

by Elaine Schwartz    •    Mar 26, 2014    •    286 Views    •    TIME TO READ: 1 minute

A major source of Sao Paulo, Brazil’s water supply has shrunk. Down to 14.7% of its capacity, the Cantareira Basin supplies almost half the area’s water. With little rain until recently (and it’s the rainy season from December to March) and record heat during January, demand for water is way up. Officials are worried that the water crisis could continue onward to June when Sao Paulo hosts the World Cup inaugural match and 5 other games.

Concerned about the water supply, a water utility official said that, “The solution is to use water strictly for hygiene and health only and not for washing cars or sidewalks — that’s the only way out that we have. If none of these measures are taken, if there are no fines for those who use water inappropriately and if they’re not cut off, without a doubt we run risks” of World Cup shortages.

Meanwhile, the 850,000 people who live near Sao Paulo’s International Airport, have water every other day.

As economists, water shortages take us to marginal utility and the usefulness of an extra amount. Typically, when water is plentiful, we think minimally about using more. There is little cost and little sacrifice for each extra gallon. However, during a drought, water’s marginal utility increases considerably. Taking a long shower might mean not being able to wash the dishes. Consequently, the sacrifice or cost of using an additional gallon–the marginal utility– has gone up.

Here are US drought conditions:

US Drought Monitor

From: National Drought Mitigation Center (NDMC)

 

Sources and Resources: My facts on Sao Paulo were from Bloomberg. At econlife, we looked at the increasing marginal utility of water in Wichita Falls, Texas.

 

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