Some of the costs facing firms in the water and sewerage market are domestic, such as upgrading Victorian pipe infrastructure and building new reservoirs. However, finance costs are often determined globally, with many regional water companies owned by international investment consortia and sovereign wealth funds. For example, one major utility provider, which has significant foreign backing, recently faced criticism for paying out large dividends while struggling to manage its £14 billion debt pile. Some firms have cut maintenance staff to reduce short-term operating costs while proposing to raise customer bills by an average of 12% to fund necessary long-term environmental investment.
The cost of treating wastewater could decrease if more advanced filtration technologies, such as industrial-scale reverse osmosis, are widely adopted. However, these technologies are highly energy-intensive. While in some countries state-backed investment has kept consumer bills low, UK privatised water companies operate as regional natural monopolies. Without strict regulatory intervention from the regulator, Ofwat, these firms have little incentive to pass cost savings onto consumers.
Critics of the regional water monopolies argue that water utilities should never have been privatised as they can never behave or perform like competitive supermarkets. They claim that this is due to differences between the two sectors, such as the absolute lack of consumer choice, high barriers to entry, the necessity of the good, and the massive scale of infrastructure investment required.
Question
'Critics of the regional water companies might argue that water utilities should not have been privatised as they can never behave or perform like supermarkets.'
(Extract C, lines 14–16).
Using the data and your knowledge of economics, assess the arguments for and against the UK water industry being brought back into public ownership.
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.