According to Ricardo, rent entails the amounts paid to landlords following the utilization of the indestructible and original components of the soil. On the other hand, there has been a rising trend of privatizing scarce water resources around the world (Glennon, 2004). The theory brought forth by Ricardo has been important when it comes to assessing the issues surrounding natural resources that have an economic value attached to them. Moreover, they can be privately appropriated and this affects their supply to the respective consumers. It is vital to note that ground and surface aqua continues to be restricted year to year. The inelasticity of water supply has made it mandatory for policymakers to scrutinize this matter and try to come up with technological advancements for a better future.
Ricardian Rents
The importance of water reserves is evident given the reliance of different industries on the capital. Besides, human survival cannot be possible without an adequate stock. It is essential to remember that demand for water should be inelastic (Keyhani, Lévesque and Madhok, 2015). The primary reason for this is because the uses of aqua in different parts of the world are not subsistent. Therefore, people choose places to stay depending on the economic value stick to the area and the fact whether there is a good water amount. For this reason, their existence will be sustainable if these conditions are met. Notably, the areas where the price of water is relatively high does not mean that customers cannot carry out activities such as gardening, washing and cleaning among others.
The implications of the Ricardo’s hypothesis are evident through the wages charged. In particular, he made it clear that payments are not related in any way to the level of productivity of labor (Ethier, 2017). However, they are dependent on the fertility of marginal land. Therefore, the amount that is over and above the earnings becomes the rent of the landlord. Moreover, the landowners cannot set the sum but rather appropriate additional capacity they can produce out of their piece of earth. For this matter, it is impossible for the holder to shift costs such as taxes to the tenants provided there is no effect on the marginal land productivity. The cost of the least value land determines the amount of money and subsequently the pay lessors receive as rent from their tenants.
Ricardo’s law of rent is applicable when it comes to different economic interactions. In particular, he separated lease from wages that arise from labor supply. Therefore, wealth according to him was multiplying from modifications made on land in a move to meet the desires of clients. The man stated that the charge is influenced by the extra bonuses it has to offer over the same application when carried out on the least fertile ground. For this reason, the different land uses accrue massive positive aspects to the consumer. Rental fee increases whenever more units utilized in the process come into play. Besides, the factors can either be homogeneous or heterogeneous (Jäger, 2003). Hence, in a case where the factor of production is heterogeneous, then the utilization of extra units implies that there is the introduction of less effective units compared to the ones employed before. It is important to highlight that there is the extensive margin law of diminishing returns when it comes to the usage of land as a factor of production. Subsequently, the sum rises following the growth of the uniform price over cost provided the marginal units functioning are also rising.
The Ricardo’s theory of rent applies to the supply of water given that the urban systems have four distinct components. They include private reserves, public institutions that allocate water amongst the different uses, the demand by major consumers, and the externalities that arise from the procedure (Glennon, 2004). When it comes to private supply, the primary focus is on the extraction rates by the firms. For this cause, water utilization if carried out in a sustainable way will ensure that wastewater returns to the environment to avoid a lower inflow in the future. Besides, responsible aqua management will lead to a zero opportunity cost for the incremental water whereas the only accruing cost arises from distribution and treatment. However, if the supply is not reasonable, the world economic development will be threatened as the rents will be unreasonably high due to more expenses. It is important to note that Ricardian rents are charged when there is optimal pricing across different water sources and the storage is sufficient.
Monopoly profits when limited in the private water supply ensure that the distribution is efficient. In particular, there is the need to discourage price discrimination whereby all fares correspond to the marginal cost of manufacturing. Therefore, some customers cannot be excluded when it comes to water supply. On the other hand, the high fixed charges pose a challenge to governments as they are unable to ensure adequate tariffs are debited during the process (Jäger, 2003). The clients can mobilize themselves to guarantee that there is a decline in tags whereby there is a deduction of Ricardian rents. However, the move to cut down expenses will translate to a reduction in investment and thereby generate the excess demand. Similarly, there will be siphoning off money from the supply system by private companies. Ultimately, there will be a deterioration in the quantity of aqua resulting in extra requirement. Thus, the economic growth will be affected.
There is a likelihood of charging cartel rents owing to the productive and allocative inefficiencies. Moreover, the need for improvement of services and the rebate in prices by the regulating bodies can lead to monopoly charges. Therefore, the natural ownership that comes into play in the presence of private water supply organizations causes credibility issues. The step to control the expenses on the resource by private entities is valid as there is the need to remove the Ricardian rents.
Privatization of Water Reserves
The supply of water influences the performance of enterprises that rely on this crucial substance. In particular, the value, quality and availability of aqua differ from one place to another. That is why the authorities have introduced appropriation structures, price rules and administrative institutions to ensure the efficient supply. There exists direct competition in the sector and this may lead to socially feasible or undesirable policies. Thus, authorities undergo difficulties when it comes to formulating guidelines that regulate separate companies that have an access to water resources in order to ensure that the capital costs are recovered in the long run. The World Bank acknowledges that there are corporations that have been allowed to manage water as well as sewerage countries in developing nations. Out of 27 firms, only 3 are sales of equity to privatized businesses (Ethier, 2017).
Apart from the price structure that arises from privatizing water reserves, the ratio of fixed to variable costs is high owing to the land rents. Moreover, the charging of payment from the water stock will imply that they do not need to recover capital costs in the short run. If this is not done efficiently, then clients will not be in a position to receive a steady water provision (Jäger, 2003). On the other hand, the regions that are undergoing a significant economic growth and a rise in the population need to make sure that the investment in the water reservoirs ought to be sufficient to avoid shortages. Thus, the governments in regions where the individuals depend on private water supply need to allocate optimal assets and this will be through making secure that rents from separate firms are affordable.
Avoiding Adverse Effects of Privatization
Governments can ensure that privatization of fresh water stockpile does not impact the consumers negatively. One of the ways of doing do is putting into place strong control bodies that guide the procedure of operating with reserves. In particular, the institutions should not subdue themselves to short-term political forces that are brought about by people who want to serve their selfish interests (Schneider, 2016). Secondly, there is the necessity to pass rules that protect the rights of investors. The laws play a vital role when it comes to ensuring the government officials do not enter into contracts that will result in unfair competition among private entities. Similarly, the principles will be important when it comes to reasonable compensation to consumers whenever there is the need.
Third, the authorities need to allocate sufficient financial resources when it comes to water projects. For example, there is the option of issuing contingent liabilities that mature upon expropriation (Glennon, 2004). Another way is through the government retaining the controlling interest of the privatized freshwater reserves. Therefore, it will be in a position to bear a substantial part of the arising costs and allowing clients to pay affordable prices. Lastly, the ministry should reduce the probability of advocates of expropriation acquiring powerful posts. The proportional representation will guarantee that there is the clear-cut separation of responsibilities and thereby avoid favors in the privatization of water stock by competing companies.
Private water firms with the capability of supplying the public with the scarce resource must acknowledge that the ultimate charge is borne by the customers. However, if there is a reasonable provision, the price should only make up a small portion of the total cost. The other expenditures such as capital, treatment, staff wages and electric power are recovered in the process (Ethier, 2017). For this reason, the increase in the regulation expenses like abstraction charges should have a small impact on the price paid by the consumers. Besides, it is up to the private firms that offer water to people to ensure that there is minimal leakage in their distribution systems as this will translate to cost-effectiveness. Hence, the economic growth will not be impacted by the privatization of the freshwater reserves.
Water plays an essential role in different sectors such as power generation, manufacturing, mining and construction. The use of small quantities of aqua in these industrial companies will be possible if there is an introduction of incentives by the government to ensure the pricing is relatively affordable. On the other hand, the sectors that require large amounts should encourage the re-use and thereby cut the expenses incurred. In the developing countries, farming consumes large amounts of water, especially in irrigational agriculture. There is the need for full-incentive pricing of water supply by private firms if the farmers are to realize profits. However, in the absence of full enticement, there is a possibility that people will earn low incomes that will ultimately lead to a slowdown in the economic growth.
Conclusion
To sum up, the Ricardian theory of land rent focuses on the amounts landlords get after the consumers utilize the components of the soil. It is important to note that water is among them. On the other hand, there is a rise in the privatization of fresh water reserves which has contributed to the increase in pricing of the supply. For this matter, the inelasticity of aqua distribution has forced policymakers to look into the separation of water stockpiles to safeguard future charges. Moreover, people select areas of stay by evaluating the availability of water. Ricardo considered the rent paid as a source of wealth that resulted from meeting human needs. Thus, there is the growth in rent whenever the marginal units’ underutilization is increasing. Sustainable water usage will ensure that the world’s economic development is not under threat as the aqua is channeled back to the environment.
Regulating monopoly profits when it comes to private firms offering water to public is important. However, the high fixed costs attached to supply have made it difficult for the authorities to negotiate for lower prices. On the other hand, the allocative and productive inefficiencies have led to the segregated rents. The push by the government to guarantee better services in the provision of water has also caused cartel charges. Hence, the competition in the market has contributed to both undesirable and feasible decisions. In a move to make sure that there are no adverse effects emanating from the privatization of fresh water reserves, there is the demand for optimal investments by the institutions as this will translate to reduced prices. By the way, instituting laws that protect investors while adequately funding water projects will encourage the economic growth in regions where reservoirs are privatized.
References
Ethier, W.J., 2017. The relevance of Ricardian trade theory for the political economy of trade policy. In 200 Years of Ricardian Trade Theory (pp. 185-187). Springer, Cham.
Glennon, R., 2004. Water scarcity, marketing, and privatization. Tex L. Rev., 83, p. 1873.
Jäger, J., 2003. Urban land rent theory: a regulation perspective. International Journal of Urban and Regional Research, 27 (2), pp. 233-249.
Keyhani, M., Lévesque, M. and Madhok, A., 2015. Toward a theory of entrepreneurial rents: a simulation of the market process. Strategic Management Journal, 36 (1), pp. 76-96.
Schneider, M., 2016. The Ricardian theory of rent. Reclaiming Pluralism in Economics, p. 133.
