Тег: Housing and Utilities

How will private utilities work? After all, there is only one pipeline, so how can water be supplied to everyone at different prices?

анонимный вопрос

I answered a similar question in quite some detail analyzing all stages of water supply in a free market, from finding a water source to its delivery via pipes to the end consumer. But you are not so much interested in how various market actors will negotiate the coordination of geological exploration, extraction, pipe laying, and repair—but rather what mechanisms will affect the tariffs for the end consumer. And, presumably, you have a concern that without central controlling bodies, tariffs will skyrocket.

Here, I suggest you familiarize yourself with the analysis of such a mechanism for electricity supplies that I provided previously. For the water market, the hard upper limit for tariffs turns out to be the cost of water production or supply by the consumers themselves: this could be buying bottled water in a store, collecting rainwater, desalination, recycling—depending on who the consumer is. But slightly before the price hits this natural barrier, the factors of competition and demand elasticity will kick in: expensive water will be conserved, and at a certain point, the supplier will realize that it is more profitable to earn from volume rather than markups, especially if alternative water suppliers do not jack up their prices and seize the market while the miser tries to squeeze their few remaining clients dry.

At the same time, of course, I do not rule out that water will be supplied to different houses by one company at different prices, taking into account the length of the pipes, for example, or the different competitive environment in different districts. Finally, a price markup is also added by the company that manages the building, if such a company exists. For instance, in Thailand, where I vacationed in the spring, it seems that every condominium has its own water price, because in one they water the garden, in another the pool is larger, in a third it is smaller, and so on. This is normal.

Here is an example of a condominium where water will certainly be expensive

What will happen to electricity and housing and communal services in general under ancap?

Anonchik Oleg

Generally speaking, it is clear why electricity was chosen for this question. Although there are currently a vast number of producers of this type of energy on the market, the end consumer’s ability to choose a provider is usually quite limited. So limited, in fact, that we can safely consider as typical a situation where the consumer always deals with only one provider.

Are there any prerequisites for a different arrangement to become the norm under ancap? Generally, no, since the current state of affairs is caused not by government regulation, but by the characteristics of the market. However, today the state, at least in Russia, regulates prices in this market, and the natural question arises: will they skyrocket if they are completely deregulated?

The norm where electricity is primarily produced by a large producer is linked to the fact that there is a pronounced positive economy of scale in this industry: a large producer has lower production costs. The norm where the end consumer is usually connected to only one power grid also has a quite understandable origin. What, then, will limit the greed of the electricity producer, as well as the greed of the grid owner?

The most obvious market constraint on the retail price of such centrally supplied electricity is, of course, home generation. The higher the retail price in the grid, the more profitable decentralized energy production becomes, whether it be solar panels, wind turbines on the roof, or simply a banal gas boiler in the basement.

Does it turn out that large producers together with power grids in a free market can inflate the price almost to the level of the cost of private generation? Generally, no, and here is why.

The thing is, the positive economy of scale works for large producers only if a large amount of electricity is produced. If a power plant is large but operates at 5% capacity, then the production cost, considering equipment depreciation, ends up being much higher than if the generation parameters were close to optimal. Therefore, the electricity producer is interested in selling all the energy that they are technically capable of producing. Moreover, artificially lowering generation opens up a field for potential competitors.

And so it happens that without any tariff commissions or other remnants of state planning, in a developed free electricity market, the producer’s margin drops to average market values for business in general, meaning roughly to the average bank deposit rate.

And this is without me even considering exotics like large-scale solar or wind generation, where the price of energy fluctuates depending on the weather, and on sunny or windy days producers might even pay consumers just to burn off the excess electricity produced—precisely such excesses will eventually be solved by developing energy storage technologies.

May I not examine all other types of utility services in such detail? I assure you, the same patterns apply there, with their own peculiarities, but leading just as surely to quite reasonable limits on tariffs.

So, shall we burn?