Question 4. In a news item that appeared on the 31 January 2014 in the Guardian

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Question 4. In a news item that appeared on the 31 January 2014 in the Guardian (an esteemed British newspaper) it is reported that in the Swiss mountain ski resort of Davos, Nestl´e chairman Peter Brabeck addressed some criticisms pointed towards his alleged claims calling for the privatization of water While Brabeck will have stoked the debate on climate change, he also sought to dampen the controversy last year in which he was accused by some NGOs of arguing for the privatisation of water and claiming is not a human right. As a student seeking expertise in economics and having finished a serious general equilibrium course, evaluate this very question. (You could imagine that you are working in a newspaper and your editor gave that particular question for you to write about in the economics section.) Could privatization of drinkable water, hence markets, work for the human kind (even if access to drinkable water is not a “human right” as he allegedly claims)? Do not focus too much on whether or not this is a human rights issue, after all ours is not a law course. Evaluate whether or not his claims can be justified or trashed with the use of formal economics arguments that you have seen in this course. I do not have to remind you that this is a serious question and I am expecting you to come up with solid arguments.

Explanation / Answer

If privatization of drinking water takes place then it means that price of water will determined by demand and supply factors. We can argue for or against the water privatization depending on the market structure under which privatization will take place –

1. Monopoly: If the water supplier firm will be a monopoly then it can be expected that it will operate at an inefficient scale compared to a competitive firm. However, it is possible that it can operate as a natural monopoly if the average costs keep declining over the output of the firm. In which case, the firm can be asked to set a price equal to the average cost of production.

2. Perfect competition: However, the regulators can attempt at making the market for private water more competitive by having a certain number of suppliers. In that way, they will be competing for the same set of resources and consumers. It is likely to be the most efficient outcome for everyone.

The question largely for consumer’s point of view is how much extra she will have to pay in order to procure the needed amount of water. While is no clear cut answer for this question, one can provide certain conditions that can help us in answering the problem. Privatization of water will certainly avoid wastage of water if the market price of water is higher than the current price. In that sense, privatization can help in prolonging the existing stock of water also. This could imply that human kind is less likely to face shortage in near term. Likewise, for seller’s perspective it must be the case that they’re able to generate a decent rate of return over their investment. To put it more formally, if one can solve for a price at which both market demand of water equals supply of water, then it can benefit both the consumers and producers. In the short run, the govt can provide some subsidy which can be later withdrawn if the cost of production declines over time. However, a major factor here will be the market structure of this market. In the presence of a few firms, it is always possible that they’ll collude and then charge an excessively higher price in which case it can become very inefficient for consumers.

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