ATLANTA—A Northwest Atlanta woman said she opened up her January water bill and saw a balance of $20,545.27 due. “It’s crazy. I don’t even know,” Elisabeth Porter said. She said she’s been waiting for the City of Atlanta Department of Watershed Management (DWM) to repair a leaking water line outside her home for months. —Courtney Francisco,”Atlanta woman receives $20,000 water bill despite reporting leak for months,” WSB-TV, January 30, 2025
This story highlights a major problem with depending on the government to provide water. Government water provision is socialism.
Recall that socialism is government ownership of the means of production and that socialism was the spectacular failure of the twentieth century. In the Soviet Union and China, it resulted in the deaths of tens of millions of people. Even if it hadn’t caused these deaths, it would have been a failure because centrally planned economies don’t do well. But why don’t they do well? There are two main reasons: (1) information and (2) incentives.
In his classic 1945 article, “The Use of Knowledge in Society,” economist and later Nobel Prize winner Friedrich Hayek argued that central planners don’t have the information needed to plan an economy efficiently. He showed that the information that matters for decision making is held in the brains of everyone in the society and that there is no way to aggregate this information without losing virtually all information that matters. Although Hayek wrote before the era of superpowerful computers, even such computers don’t capture what is in the heads of hundreds of millions of people.
The second reason is incentives. When for-profit firms produce goods and services for consumers, they have a strong incentive to care about costs and about creating value for their customers. Socialist managers, by contrast, have little incentive to care about consumers or costs. That thinking applies to water providers as well as the provision of other goods and services.
Water distribution in Monterey
But that hasn’t stopped many people from advocating that local governments provide water. I see it in the Monterey area, where I live. Cal-Am Water is a private company that provides water currently. The California Public Utilities Commission regulates its rates. A measure on the local ballot in 2018 gave voters a chance to vote in favor of a government takeover if a study found that doing so would be feasible. The vote was 56 percent in favor to 44 percent opposed. I doubt that even half of the 56 percent who voted for government to provide water are advocates of socialism. But they seem to have made an exception for water.
The feasibility study has now been done and, not surprisingly, a government takeover has been found to be feasible. In 2023, the Monterey Peninsula Water Management District offered to buy Cal-Am’s assets for $448 million. Cal-Am says that its assets are worth about twice that. So the government is undertaking eminent domain proceedings to force Cal-Am to sell. The politics of the issue are complicated. Another local government agency, the Local Agency Formation Commission (LAFCO), is trying to block the takeover. The issue will likely be fought out in court, probably over many months if not a few years. Whichever outcome happens, we will have a monopoly provider, either a socialist provider or the current regulated private provider.
I’ve talked to people on both sides of the issue. I’ve found that the people who favor the socialist solution don’t think about incentives. But incentives matter; we can’t just assume that the incentives of the government providers will be the same as the incentives of the current provider.
Caring about customers
That’s where the Atlanta story above comes in. A government monopolist doesn’t have to care much about its relations with customers. If customers don’t like the service, what are they to do? They can’t go elsewhere. It’s true that a private monopolist doesn’t have to care as much as a private competitor would, but it probably cares more than a government monopolist. The reason is that upset consumers can complain to the Public Utilities Commission. Consumers upset about the government monopoly can complain too, but—and this might just be my gut feeling—I think that the PUC would be less harsh on the government monopoly.
It comes down to an empirical issue. In September 2013, we had the kind of leak at our house that the Atlanta woman complained about. I contacted Cal-Am immediately and it sent out a crew within hours. I remember it vividly because it was over the Labor Day weekend. The guys were out there for many hours and we got only a slightly higher water bill for that month that, I assume, reflected the time between the leak and our reporting. I think it was about $20 more than our usual.
Caring about costs
Whatever you think about my “responsiveness to consumers” argument, one difference in incentives is clearcut: the incentive to care about costs.
If a socialist provider’s costs increase, no one in the socialist structure bears a cost. There are no shareholders. Either the provider persuades the PUC to let it raise prices or, if that fails, it gets the local government to subsidize it. But if the private provider’s costs increase, that cuts into its bottom line. Shareholders lose. You might argue that because the private provider’s profits are regulated, it wouldn’t care about costs because it would get the PUC to let it raise prices. But during the period between rate hearings, if the private provider’s costs increase, that cuts into profits.
Go back to the Atlanta case. The leak continued for months. Why? Again, it goes back to incentives. No one working for the government-owned water company would lose a paycheck or a bonus for not acting quickly. Taxpayers would be at risk, but they would have no say. Compare that to the leak I experienced with Cal-Am Water. The longer it took Cal-Am to repair the leak, the more water it would lose. That’s a loss to the parent company of Cal-Am. The way economists sometimes put it is that in the case of a government provider, there is no “residual claimant.” A residual claimant is someone who has the right to the residual income after costs have been subtracted from revenues. In the case of a private, for-profit entity, by contrast, there is a residual claimant: the shareholders. Those shareholders, even for a company whose prices the government regulates, have an incentive to care about both revenues and costs.
The divergence between the performance of a private water company and a government provider would likely grow over time. The reason is that technology changes over time, almost always in a positive direction. Managers of a for-profit water company have an incentive to adopt such technology if it reduces costs or cost-effectively creates benefits for consumers that the company can charge for. The company might raise the salaries of such managers or award bonuses for such good performance. Managers of a government water company, by contrast, have so such incentive. Their pay typically does not fall when their performance is poor or rise when their performance is particularly good.
The Atlanta case is a warning to those who want a government water provider.
Socialism doesn’t work. That conclusion doesn’t change when the issue is provision of water.
