How much are you willing to pay for a gallon of water? Americans frequently pay $1 for a 20 oz bottle, so would you pay $6 for a gallon of water (128 oz in a gallon)? In Minneapolis and some neighboring suburbs, residents pay substantially less than $6 for a gallon of water. Water is provided by the city of Minneapolis at a per unit charge of $3.20. A unit consists of 748 gallons of water, which makes each gallon of Minneapolis water cost $0.004![1]
The price of water is controlled by the city because water is a natural monopoly. Natural monopolies, such as gas, sewer, electricity, etc. need a substantial start-up to begin business. However, once this investment has been made, the company has full control over the market because the economies of scale create a high barrier of entry for other firms. Therefore, the government needs to intervene and provide price controls to support consumer interests. In Minneapolis, the water business is controlled by the Minneapolis Water Treatment & Distribution Services.
Minneapolis relies on one source for its water supply, the Mississippi River. The city produces 57 million gallons of water per day, which equates to about 60-70 gallons per day for the average residential consumer. The largest water consumers in the service area are the University of Minnesota, Metropolitan Airport Commission, and Hennepin County Energy Recovery Center.[2]
Minneapolis water consumers use less water than the national average for cities of comparable size. According to the 2010 Minneapolis water quality report, the per unit charge promotes water conservation. This report states that Minneapolis has seen a decrease from the early 2000s in per capita water consumption.[3] Although there may have been a decrease in water consumption during the 2000s, is it accurate to assume that this is due to a “high” charge that discourages water use?
In addition, at $0.004, water seems fairly cheap and Minneapolis could do more to promote conservation in the region. If Minneapolis did more about encouraging the conservation of water, is increasing the price of the good the best option for controlling demand? Also, a higher charge for water would be regressive. Is conservation worth the price of hurting low-income families?
Perhaps a two-tiered rate system would address the conservation and regression issues. First determine the amount of water that a family would use “in-house” and add a buffer. This way, the rate for water quantities under this threshold would remain at the old rate and amounts used above this amount would be charged at a higher rate. This would keep the tax more regressive while promoting conservation.
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