Water Shortage in England

main article: http://www.economist.com/node/21552597

In England, when dry winter season happens, the water supply will be dropped. So, the government interferes and makes some limit about the use of water therefore, the government makes a regulation about hosepipe ban and if someone was caught breaking the rules, they will be sanctioned for $1,600. This regulations made by the government is preventing gardeners job because gardeners needs water to do their jobs.

            Too make it easier to understand, let me explain by graphs

            The black dot in the middle of the graph shows the equilibrium price and the equilibrium quantity. Equilibrium means a situation where the market price has reached the level where quantity demanded equals to quantity supplied. Assume that P* is the equilibrium price where the price of the goods or services that supplied equals the goods or services demanded. And the Q* is the equilibrium quantity where the amount of goods or services bought and sold at the equilibrium price.  Equilibrium can be achieved when the price that buyers willing to pay balance the price that sellers are willing to give or when the quantities demanded match the price.

As you can see from the graph above, there is a decrease in supply. So the equilibrium price increases which mean the price will be higher and the equilibrium quantity decreases which means the quantity of the goods will be lower. From the graph, we see that S1 shift to the left to S2, while demand remains constant. Thus, there is an upward movement along the demand curve from E1 to a new equilibrium at E2.

From the main article, we know that the consumer exceeds the limit of the water usage that caused a shortage. Shortage is the circumstances where quantity demanded is more than quantity supplied. The shortage happens because the water is in scarcity condition which means human needs are always more than the existing supply of time, goods, services and resources. Scarcity happens to all people, no matter how rich or poor they are. These theory matches the problems whereby the quantity of water to produce (supply) are declining but the quantity demanded are consistent or maybe higher. As you can see, there is a decreases in quantity demanded where q1 falls to q2. And increases in price where p1 rise to p2.

In real life, water are one of necessity goods. That is why consumers bidding for the available water even though the price are rises. For this kind of matter, it needs government intervention like acting on the advice of economists. This policy can increase the efficiency by decreasing significantly the grade of market distortions connecting with government controls on prices. When government controls the prices, citizens will inevitably have to follow the rules and if they defy it, they will probably get into trouble. In the other hand, if the government does not take any actions to the urban water price, then the market will arbitrary their authority such as, rising the prices as much as they want to maximize their profit. In case this thing is happening, then the purchaser will lose much of their money.

There is an underproduction problem in this case whereby the quantity of the water is too little so the producers cannot produce much water. Underproductions is one of the reasons why market failure happens because the market do not achieve an efficient outcome, therefore we can conclude that market failure is happening in this type of case.

            The other reason why government should interfere because government has to makes some regulations regarding the use of water or otherwise people will arbitrarily utilize water for their own goods especially when the price of water is low. People will use it more than usual, maybe they will clean their car more often or for hotels they will serve free tap water for their customers.

In my opinion, government should makes a price ceiling above the equilibrium which means that the minimums selling price will be higher. This can help the problem since the water supply is declining because when the price is high people might not exceeding they needs. Binding a price ceiling can cause deadweight loss. Deadweight loss is the decrease in total surplus that results from an inefficient level of output. The yellow triangle in the graph above shows the deadweight loss. Deadweight loss also known as social loss.

            From the article above we know that government already tried to manage these problems. But in the end, if it considered fair for everyone? The answer will be no. According to Jeremy Bulow of Stanford Business School and Paul Klemperer of Oxford University in a forthcoming article, those people who respect the goods mostly do not receive their reward. And for lower income people that cannot afford the water because it’s too expensive so they try to find another way like maybe substitute it or reducing the use of water. And there are some people who are searching for the illegal way out, such as breaking the rule. So yes, we cannot actually say that this market is fair.

            It might be a good idea if government gives some reward for people who reducing their usage of water so they will be encourage obeying the rules and saves the water. Each house also should installing meters so they will not over producing the water and pays the amount that they deserve to pay. Government also needs to upgrade the security so people will not dare to break the rules. These solutions might cause more cost but it also can makes things even better.