With most scarce commodities like electricity and gas, you have to pay depending on how much you use. There would be no sense in providing electric sockets and then allowing people to consume as much as they like.

People have the assumption that water is free because it comes from the sky. But, clean drinking water has costs – costs of collecting, costs of filtering and costs of delivery. Furthermore, the last units of water have a higher marginal cost. To supply an extra 10% of the water we need to build a new reservoir which is more expensive than easier sources of water.

However, the last units of water have a declining marginal utility. The first 10 liters of water we use per day have a high marginal utility – the water we drink. The next 50 liters have a reasonably high utility – the water we need for washing. But, the next 50 liters would be of doubtful utility. This is the water we used for hosing the car, using a sprinkler in the garden or the water we use unnecessarily.

At the moment, water consumption is free so we consume up to a point where marginal utility is 0. But, the marginal cost of this water is much higher. This is allocatively inefficient.

If people were made to pay for the water they consume, they would think carefully about leaving taps on, they would have an incentive to fix dripping taps, they would wash a car with a bucket rather than a hosepipe. If people really wanted to use water for sprinkling in the garden they could – if they are willing to pay for it.

Water meters would have many advantages:

1. Encourage water conservation – important given the strain on water resources
2. Encourage allocatively efficient distribution. People would consume to where the marginal cost = marginal utility
3. In the long term lower overall water consumption would reduce the cost of investing in unnecessary reservoirs, leading to even lower water bills

I would recommend a form of price discrimination which makes consumption of water progressively expensive. I.E. basic units would be cheap. But, to have more than a ‘normal amount’ e.g. for use to water the garden would be expensive.

With global warming excess water consumption is likely to have negative externalities e.g. loss of water from rivers deplete fish stocks e.t.c. – If this is the case we will need high prices on water to reflect the social cost. The water companies should also be able to increase prices whenever there is a water shortage (and lower them when we have a very wet summer and water levels are high).

People will say it is not fair to big families will have higher costs. But, it’s like saying it’s not fair to big families have to spend more on food because there are more people. I really can’t think of any arguments against water meters. Just like I can’t think of any arguments to say electricity and gas should have a fixed price for unlimited use.