I pity poor Gene Cranick, unhealthy the rural Tennessean whose house burned down because he failed to pay the $75 fee required to receive firefighting services. I pity the South Fulton town fathers, treatment who came up with one of the most lamebrained revenue enhancement ideas of all time. All so unnecessary. Had more thought gone into the idea, ambulance Mr. Cranick’s house could have been saved, as could have South Fulton’s fee-for-essential-service idea.
I’m not completely adverse to disaggregating public services. Sometimes (road fees, for instance) they can serve as useful price signals. But, there are limits. If you disaggregate essential life support services — EMS, police, fire — you threaten to destroy the essence of a community and turn citizens into customers. Heck, in a community we are all free-riders at some point; trying to balance every account to the penny bespeaks an unbecoming parsimony. And, denying service to a free-rider affects the community as a whole: How happy do you suppose Mr. Cranick’s fee-paying neighbors are to have a value-destroying, burned-out hulk occupying the lot next door? And while their homes are worth less, their property taxes are going up, because the tax base is no longer supported by the Cranick residence. I’ll bet their fire insurance premiums are going to rise, too. Here’s a good general rule: If giving service to a free-rider will destroy your business model, and denying service will be a PR nightmare, don’t disaggregate the service.
So what’s the solution for those communities dead-set upon disaggregation? A two-tiered fee system. If you sign up in advance, you pay $75 per year. On a per-call basis, the fee is substantially higher — say, $750 per incident. A familiar concept, instinctively understood and accepted by most everyone. Publicize it widely, and remind non-subscribers of the fee when they call 911 for help. To be fair, accept payment by cash, credit card, check, property lien, even an I.O.U. And when the firefighters show up, don’t just collect the $750 — strike while the iron is hot and sign ‘em up for the yearly service. If a municipal body wants the market to solve its financial problems, its administrators have to think like retailers.
On August 2, The New York Times ran an article by Steven Lee Meyers, titled “A Benchmark of Progress, Electrical Grid Fails Iraqis“. As a former member of the Provincial Reconstruction Team responsible for Diwaniyah Province I was familiar with the problems discussed in the piece. On most days, electricity was available in Diwaniyah for only a few hours while the official line from my colleagues in Baghdad was that electricity was widely available throughout the country. The article is generally excellent but fails to conclusively answer the main question, why is supply unable to keep up with demand?
The article neglects to mention that electricity is being priced as if the supply was infinite. In a free market, demand and supply are always in balance, and stay in balance through the pricing mechanism. If the demand for Budweiser rises above the ability of Anheuser-Busch to produce beer, the price rises, until the supply matches the demand. If the demand falls, so does the price. However, the Government of Iraq does not charge a market price for electricity. It prices it artificially cheaply in an attempt to buy popular support.
This wasn’t a problem when Iraq did not have an open economy, particularly during the sanctions regime, but after the fall of the Saddam dictatorship, the Iraqi public now was free to satisfy decades’ worth of pent-up demand, and it purchased all manner of energy intensive consumer goods: Air conditioners, televisions, refrigerators, etc. Electricity was, after all, for all practical purposes, free. The result was predictable: shortages and the emergence of a grey market.
What’s the solution? Proper pricing is one, but it isn’t a realistic one. If no U.S. politician feels safe uttering the “T” word, certainly no Iraqi politician will be willing to suggest in front of a camera that the solution to the problem of inadequate supply is to raise prices. A more realistic solution is to privatize the sector. A creeping privatization of sorts is already in place, as Mr. Evans notes, so the Iraqi citizenry has already been desensitized to the prospect.
Privatization of state-owned enterprises has not always been done right, but I think by now the development professionals have learned enough lessons to avoid the worst of the mistakes they made when the Soviet empire fell. Should Iraq take this step, private ownership would price electricity correctly, demand would go down, and there would be plenty of electricity for everyone.