Yeees! Pure Water! Pure Water!

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In this post, and others to come, I have decided to focus more on Microeconomic issues in Ghana as suggested by Dr. Camara Obeng, my Economics Lecturer and attempt applying Microeconomic theories to them. I am grateful for the advice Doc!

Recently, the Public Utilities Regulatory Commission (PURC), the regulatory body responsible for Utility pricing and consumer protection, announced a 59.2% increase in electricity and 67.2% increase in water, at a time where inflation was at 17.7% and as expected, consumers were not happy about it. On 11/ 02/ 2016, the Ghana Statistical Service said inflation increased to 19% in January, water and electricity hikes clearly playing a role.

Sachet Water Price Discrimination
Rumours emerged that Sachet Water Companies & Distributors were expected to increase the price of a bag of Sachet water from GHc3.0 to GHc5.00. This is a 66% increase in prices, meaning, they, as water producers would be shifting the entire “water tax” onto the consumer because, water is a necessity of life, and therefore, has an inelastic demand. The consumer will still consume water, regardless of the price.

What actually happened in the University of Cape Coast, for example, is 3rd Degree Price Descrimination. You have to understand that, the University of Cape Coast is in-actual fact, divided into two(2): Oldsite, and Newsite. Within Newsite, there are heavily student-populated locations such as Amamoma and sparsely student-populated locations such as Kwaprow.

A bag of Sachet Water in Amamoma costs, GHc 5.00 whiles the same bag of Sachet Water is priced at GHc 3.50 in Kwaprow. This is a 66% and 16% increase in prices respectively. This is price discrimination, because Sachet Water Distributors are pricing the same commodities, produced at the same cost, at different prices, in two geographical areas. This is done to maximize profit because, Amamoma consumers are willing and able to consume water, at higher prices due to their high population, therefore, have a demand for water, which is highly inelastic. Kwaprow consumers on the other hand, have a less inelastic demand for pure water partly, because they are few, so there is less competition among consumers for water.

You might ask:”Why will the Distributor not price water in reverse (high in Kwaprow and low in Amamoma)?” You might be thinking Water distributors will have an incentive to price it that way because Amamoma is heavily populated, so more people will consume more at a lower price? The reason is simple: Amamoma consumers have a highly inelastic demand, so are less sensitive to price increments, which the producer exploits to maximize profit. Price discrimination is profitable in UCC because, Amamoma and Kwaprow have different elasticities of demand.

Transportation costs from Amamoma to Kwaprow is about GHc 1.20 in and GHc8 out (assuming a student is transporting bags of water back to Amamoma), currently. For Amamoma consumers to consume each bag of water at the price of GHc3.50 or less, they will have to buy a minimum of 53 bags, at a per unit cost of GHc3.47, after factoring in transportation costs. Anything less than 53 bags of water, and it will NOT be worthwhile since that will increase the per unit price.

The Sachet Water Distributor knows perfectly well that, due to the high transportation costs, and the unlikeliness of a student to purchase 53 bags of water at a go, means they will have little incentive to consume Sachet water sold in Kwaprow.
BUT, Amamoma consumers, could “waterpool” and combine their resources together, to purchase 53 or more bags of water from Kwaprow, thereby each enjoying a unit cost of GHc3.47 or less.

To anyone who read my blog post to this far, thank you! Please stay tuned for more!