A Nobel Prize Winner in Economics to Take Care of Water

BY: VALENTINA ROZO*

 

Lea la versión en español de este blog aquí.

 

Population growth, the economic development model, urbanization and pollution are leading to a water shortage. Given that we are still not able to create new sources of this liquid, what can public policy makers do so that citizens take care of water? The answer is to follow the advice of the latest economics Nobel winner and help people through small "nudges" to waste less water, as some countries have already done.

One of the major contributions made by Richard H. Thaler, who received the Nobel Prize in economics on October 9th, is the “nudge” theory. It shows how small nudges can result in people making different decisions than the ones they normally would. This type of nudges are very useful for public policy because they allow government leaders help citizens to make better use of resources without taking away their freedom, which is key on issues like water.

Costa Rica is a water-rich country that is already facing the first water cuts: although 99% of the population has access to the water supply, 17% do not have it in a constant fashion. Belén, a small town in Costa Rica with 21,633 inhabitants, has a particular characteristic: water consumption was 1.25 times higher than the national average. Experts predicted that the entire city could face cuts in less than two decades, which would have caused the public administration major headaches. How to make residents consume less water? Economists had the answer.

To solve this problem, a group of researchers decided to make three interventions with a different nudge. The first was called the "neighborhood comparison," in which households received a blue sticker with a congratulatory sign for having used less water than the neighbors or a yellow sticker with a series of recommendations to reduce water consumption if it had been greater than the average.

The blue sticker congratulates the household, while the yellow one encourages a reduction in water use.

The blue sticker congratulates the household, while the yellow one encourages a reduction in water use.

The second nudge was "city-level comparison", which worked like the previous one, but made the comparison with the entire city. Households were not compared with people that they probably knew (since they were neighbors), but with more than 21,000 residents.

The green sticker congratulates the household, while the red one encourages a reduction in water use.

The green sticker congratulates the household, while the red one encourages a reduction in water use.

The third group, "make a plan," received information on the average consumption of the city during the previous month so that the household could propose its own goal.  This nudge sought a self-reward, in which household members had the satisfaction of achieving their goals.

The results of this intervention corroborated the nudge theory: with the "city-level comparison" there was no change, but the "neighborhood comparison" was able to achieve a reduction in water consumption between 3.7% and 5.6% per household, while "make a plan" reduced between 3.6% and 5.6%.

This contradicts what economics schools have taught for over the last half century: that we are homo economicus. The term refers to us being merely rational beings that only seek to maximize our own benefit through a series of mathematical derivatives. If we were homo economicus, we would consume a specific amount of water, regardless of a sticker on our bill. But in reality, we are irrational. Literature has shown that among all the factors that lead us to act in one way or another, there are two that stand out: monetary motives and social motives. With this in mind, a group of researchers decided to test 9 different nudges to see which one humans are most responsive to.

Monetary Nudge

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Social Nudge

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Cape Town researchers used these 9 nudges for households to save water and found that all these interventions reduced water consumption between 0.57% to 1.87% This was between 159 and 467 liters of water saved per month! Of all the nudges, the most efficient was the "social recognition" one, in which those who saved more water would appear on the city’s website.

The Cape Town case shows that as humans, we like to feel admired by other people. However, the truth is that we are also egocentric. The most incredible thing is that we are so irrational, that our ego cannot resist a nudge, as in the case of Bogota.

In 1997, part of a tunnel that provides water to Bogota collapsed and created a water crisis: 70% of the city would be left without water if consumption was not reduced. The first thing the government did was to publicize the emergency hoping that people would save water. However, the opposite happened and the homo economicus within us increased water consumption (if water is going to run out, everyone wants to have liters saved at home to survive the crisis). To correct its error, the government used different nudges. First, it gave stickers to households, offices, and schools so that they could be placed near a faucet, where they would be motivated to save water. The government also awarded those who saved water with the help of the aqueduct’s manager, who delivered a badge to those with exceptional savings that read "Here we follow a rational plan to use the precious liquid." The amazing thing about these nudges it is that they did not only avert a crisis in the town, but also reduced water consumption for years!

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These are just a few examples of how governments can use very cost-effective strategies (in every sense) to get citizens to make better use of resources. Our development model has led us to exploit resources as if they were unlimited, thinking only about our own benefit and without taking into account the world we will leave to future generations. There are hundreds of mechanisms that as a society we can use to protect the environment, but policies are often based on humans being homo economicus and on the assumption that we need changes in prices or penalties to change our habits.

These examples have shown us that there are already nudges for households to save water. However, the reality is that most water consumption does not occur in households. For example, gold mining uses 450 to 1,060 liters of water per gram in Colombia. It would be great if public policy makers created nudges to reduce water consumption by industry as well. And not just water: fuel, timber, minerals and other hundreds of resources.  What if governments listened to the new Nobel Prize in Economics?

 

* Valentina is a researcher at the Center for the Study of Law, Justice and Society (Dejusticia).

Featured photo: Steve Johnson