Here is my piece for Forbes.com on the privatization of residential water supply in the Third World. Excerpt:
And no, I don’t mean a water
concession with a price regulated by the government, I mean true
laissez faire in water supply. No price regulation, no rate of return
regulation, no government ownership of assets, no political pressure to
keep prices low. Water companies should be allowed to maximize their
profits, and because supplying water is nearly always a monopoly, they
should be allowed to make monopoly profits. I know the idea sounds
crazy–to an economist, water supply is a classic "natural"
monopoly–but on closer inspection the other alternatives might be
If complete deregulation
is too radical for you, consider the interesting compromise proposed by
the economist Jeffrey Sachs, currently heading the Earth Institute at Columbia University.
He suggests that the private company be allowed to charge high prices,
but only under the condition that it allocates a minimum amount of
water for everyone, either for free or at a much lower price. Basic
water needs would be met, and the company still might make a profit.
That said, I’m less worried about high prices than Sachs. Let’s say
the new water prices were so high as to capture all the benefits that
buyers would receive from the new supply of water. We can expect much
lower rates of diarrhea and other diseases, if only because the water
supplier can charge more for cleaner and safer water. The resulting
decline in disease means that children will die less frequently and
adults will be healthier and more energetic. Those long-term social
benefits are of enormous help to poor communities, even if high prices
take away many of the initial, upfront benefits of the new water
supply. In other words, we should consider radical privatization
precisely because water is a public good and because clean water is so
important for long-run economic growth.
Read the whole thing.