Market failure — practice question

In 2015, the World Economic Forum named the water crisis as the largest global risk. In many Asian and African countries, water supplies were down at critically low levels and could not satisfy the growing demand. This demand has increased because cities have expanded and population numbers have risen, creating a much larger need for agricultural output. Water scarcity affects many developing countries, where life expectancy is low. It is estimated that one third of all healthcare facilities in these countries do not have access to safe water or basic sanitation. Shortages of water damage public health - 80% of all illnesses in developing countries are caused by poor water and sanitation conditions. Water shortages also limit the level of food production. Table 1 presents the risk of water shortage (with the highest risk being 5) and Gross Domestic Product (GDP) per head in US$. Because of water shortages, a number of countries and regions have tried privatising supply. However, since water is a necessity, private provision has in some cases caused consumers to face major price rises. It is estimated that a 10% rise in the price of water leads to only a 0.7% fall in quantity demanded. This suggests that governments need to regulate water markets in order to safeguard consumers. Some economists believe that water has been consistently undervalued, which has caused it to be used inefficiently. The reason is that prices do not take into account the long-term effects of failing to conserve this valuable resource. As climate change leaves much of the world facing a hotter and drier future, water is likely to become even scarcer. More than 663 million people are estimated to be living without access to clean water. The World Bank provides finance for a range of projects aimed at dealing with this and, in doing so, lowering absolute poverty. Better access to natural resources is regarded as vital for encouraging economic development in some of the world’s poorest countries.