Aqa A2 Economics - Issues Around Supply and Use of Water

Economics Past Paper Question: ‘The Supply and use of water result in many externalities, both positive and negative’.  Using the data and your economic knowledge, evaluate UK government policies that could be used to deal with problems associated with the supply and use of water.

There is a strong debate over what policies the UK government should implement in order to deal with the issues relating to water. The key issue that must be addressed in order to make an appropriate decision is whether water is a merit or demerit good which can be solved through the use of a cost benefit analysis. Using this, the government can use problems associated to water that don’t retract from its merits as a good.

The major positive externalities in the use of water come from improved health as a result of clean water. If people consume clean water then they are likely to become much healthier and less reliant on health services which is a clear benefit. This comes from things such as the clean water containing fluoride which improves dental health and reduces costs. Although in the UK the water supply is very clean, in some countries the water supply is more contaminated are people are more likely to become ill from its consumption rather than healthier. This means that the government will have to adopt different policies for different areas but in the case of the UK, they should provide subsidies for the use of water due to its positive externalities. It could be argued that these positive externalities are greater than the personal benefit gained from consuming water and therefore it is under consumed. If this is believed to be the case then the government should provide a subsidy in order to increase consumption to the socially optimal level. If the government used a cost benefit analysis then they could accurately determine whether water is actually under consumed as is suggested and could then take appropriate and then take the appropriate action. If the government was to impose a subsidy then it should be equal to the vertical distance between the MPB and the MSB curves shown below.[pic 1]

However, it could be argued that at the moment there is too consumption of things such as bottled water which doesn’t have any additional external benefits over regular tap water which some people think is a waste of water and is unnecessary. This wastage water could be used more efficiently by giving to other countries where there are water shortages such as in Spain where there is a drought. This water can be considered as having greater external costs than tap water as well as being wastage. This is because to produce a 1 litre bottle of water it takes 3 litres of water and one fifth of a litre of oil. The extra water needed is the issue with wastage but there is also the concerns over using oil unnecessarily which contributes to global warming and adds to the external costs in the production of water.  This release of carbon dioxide in the production of bottled water is estimated to be 600 times more than that in the production of mains water according to Thames Water. Due to the issues associated to the production of bottled water the government should introduce policies to reduce its consumption. This could come in the form of regulation or through the use of taxes. One method of regulatory method the government could use to reduce the production of bottled water, and therefore its consumption, could be pollution permits. The government would decide on a set amount of pollution it will allow from the production of bottled water and give bottled water companies permits to pollute which adds up to the set level of pollution. This will encourage firms in the bottled water industry to cut back on their pollution either to make money from selling their permits or if they are bigger polluters they will want to decrease pollution to reduce the increased costs of having to buy permits from other companies. Another method the government could use to reduce pollution from bottled water production is taxes which will increase prices and discourage the consumption of bottled water and make people buy substitute goods such as mains water which is much less wasteful and harmful to the environment.