Basic economic theory shows how subsidies distort markets*: if someone else is paying for (part of) my purchases, I will buy more; if someone is paying for (part of) my purchases of some goods and not others, I will buy more of the former rather than the latter. Economists call these income and substitution effects, respectively. What do these economic insights tell us about the water capacity subsidy the City hopes to finish setting up in the water rate election?
I will start with the income effect. New housing (like almost every other economic good) isn’t the sort of thing we should try to maximize: the marginal benefits start to go down and the marginal costs start to go up at some point. If costs are reflected in prices, markets would lead people to economize on their consumption of new housing just when it starts to get costly. Subsidies will lead people to blow past the sensible limit on new housing. In practice, this means more new housing and more resource use - air, water, land - than is warranted by actual market demand. The fact that we are reaching the limits of our sewage, water, and stormwater systems suggests that we are actually at this point.
The substitution effect is equally important. Low water capacity prices for new development compared with everyone else creates a cost advantage for new housing (and commercial space) over old housing (and commercial space). Existing home and commercial-space owners are at a disadvantage when they have to pay (at least) full price for new water capacity and new development pays a cut rate. There is a fairness issue here, of course, but also a housing mix issue. As a matter of contingent fact, new development in Norman tends to be suburban, which tends to be the costliest development for the City in terms of resource use. Subsidizing new development, then, is a matter of encouraging them most resource intensive development, leading us to overconsume even more than the income effect might suggest.
One might think that the distortion created by a 40% discount on water capacity might not be so large as to have a big effect in the grand scheme of things. There is some truth to that - the total water capacity subsidy will be something like $1.2 million over the next two and a half years, roughly. That is real money, of course, but not a big percentage of the total costs and benefits we are talking about here. What matters here, however, is the principle.
Because of the threat of DEQ fines, etc., our water issues will get paid for, even if nothing else does. (The City can use general funds to prop up utilities if need be.) If the voters reject this rate increase on the grounds of fairness, we will get a more fair rate increase next time, albeit at a high price in terms of City government chaos. (Perhaps the City should be figuring out a contingency plan so we can make an informed decision here ....) What we won't have another crack at, however, is an opportunity to fix Norman's complicated sprawl/center-city/environment/development issues. The City has shown that it is incapable of keeping all of the relevant features of this planning problem on the table at one time (for each Center City Visioning process, we approve a Wal-Mart to undermine it). The only mechanism that citizens have to 'cry foul' with any real voice is a water rate election. In fact, the whole point of having citizens vote on water rates is to give them a lever to influence development policy - it isn't an elegant system, but we can make it effective.
Fixing the relationship between the development community and the citizenry is crucial NOW. As we saw at the City Council Meeting, some people are starting to question the basic principle that development should pay it's own way. It has even been suggested by some Councilmembers that we should be reconsidering our (currently inadequate) Wastewater Excise Tax (WWET). As underfunded as it is, the WWET is the 'crown jewel' of past policies to hold new development responsible for the costs it imposes on our community. There seems to be sentiment on Council to 'study it down', which would be going in the wrong direction. The water-connection fee is a small issue compared to that, but now is the time to take a stand, while we have some leverage.
__________* Market distortions are not always bad. We might, for example, want to get people to switch from free-market levels of heroin consumption toward more methadone consumption.
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