Putting a price on water and it's effect on food prices.

Labour’s plan to charge for water was met with hysterical squeals from farmers and commercial water users. Apparently farmers will go broke and apples will cost $2.80 each. It is of course all complete poppycock. 

This situation is a mixture of Labour’s poor policy design and a knee-jerk reaction from vested interests. A well-designed charge on water would have none of the impacts that National and the commercial water users are suggesting. In fact charging for water in a sensible way improves our economy. Let’s look at 3 reasons why TOP’s plan to charge for water will not increase food prices.

1. Free water only increases land prices – so charging will only reduce land prices

There is a claim that charging for water will increase food prices and/or reduce employment and profit for farmers. None of these claims are true.

When farmers got consents to use water for free, did food prices fall? No, all that happened was that the value of the water got capitalized in higher land prices. On average free water increases the value of land by $8,000 per hectare – money that the farmer pockets in untaxed capital gain.

A water charge will just reduce land prices. Lower land prices will mean lower costs for businesses, so employment, production and food prices won’t be affected. Given that water is a public resource, it is fair that the public benefits from it, rather than handing farmers untaxed capital gain on their farm value.

2. The most efficient users of water will prosper and grow

Charging for water could even make food cheaper.

Currently in New Zealand, water is scarce in certain places at certain times of year. When there is scarcity, how do we decide who gets the water? At the moment this is decided on a first come, first served basis. This is an incredibly inefficient way of doing things, basically a communist-style queuing system. We have no way of knowing that our precious water resources are going to the best possible use. Only by charging for water will ensure that scarce water resources will go to those businesses that can create the most value. Such an approach is just rational economics and removes privilege, that is all good for improved national well-being.

By not using a charge for water National are revealing their willingness to cast aside their economic credentials when it suits them or their constituency. Of course National know this, they know that charging for water is needed and would be the most efficient way of doing things. But they also know that charging for water would raise the question of why the public (and Maori in particular given their Treaty rights) aren’t benefiting from that charge. So they are in a bind.

In some areas, informal markets have already formed. That’s right, some people already pay for water – however it is private consent holders that are profiting. Is that fair, did the price they paid for their consent reflect that opportunity, or did they get that on a first in, best dressed basis too? You can see that the scope for privileged access to The Commons is massive here, if the rights of the environment – which we all own – are not respected.

3. TOP will only charge what the market can bear

The price of most of the food we consume is set by the international market. Placing a charge on water won’t change what farmers can get for their produce, it simply makes them pay for an input. Businesses usually pay for inputs, so what is the problem? Food prices won’t be affected by a water charge, as we pointed out above, it is land prices that will fall.

Of course Labour have left themselves open on this point. By setting an arbitrary charge for water – their royalty – they could potentially make water use unviable in some areas and put the farmers there out of business. This is where TOP’s policy is clearly superior because we will only charge a market price for the water. Under our system a farmer will only offer to pay as much for the water as they can afford. If water is plentiful, the price will be low – even zero, encouraging more businesses to move near that cheap source. If water is scarce and the price rises so some farmers can’t afford the market price, then that means someone else can afford to pay the market price. If that is the case, then it is appropriate that the water goes to that higher value use. The water still gets used, and the local economy still benefits from that activity. That is how markets work – if you can’t afford to pay for your inputs you either change your business or even go out of business. This is the creative destruction of bog basic capitalism at work, no drama.

Labour’s attempts to guesstimate an appropriate price is dangerously simplistic. It will either be set so low that it makes no difference, or set too high and force too many people out of business. Typical of a party that thinks it knows better than the market.