Friday, February 24, 2017

Water Price Raising - Psychological Feeling vs. Mathematical Analysis

One announcement Minister Heng Swee Keat made with the Budget 2017 that created strong reaction from Singaporeans was the raising of water price by 30% in two years. Radio stations made talk show on it and invited listeners to give their view. One of the callers suggested that the authority should have raised water price "gradually" over the past 10 years instead of making this "quantum" price jump at one go. The invited guest, one MP concurred to this opinion and said he would bring it up in the parliament during the budget debate.

A gradual price increase is psychologically easier to be accepted by consumers than a price jump of 30%. However, a mathematical analysis shows this is not necessarily advantageous to them in term of the money paid.

let's make a simple analogy. Say, a certain necessity commodity cost $1,000 for the past ten years, and the price jumped to $2,000 on the 11th year.

Now instead of this price jump on the 11th year, the price increased by $100 each year from the 2nd year onwards. So on the 11th year the price is $2,000, same as the first scenario.

Do you see that you actually pay more in the second case?

Now is it really better to pay more with the gradual increase? You decide.

Now I understand the Chinese saying 温水煮青蛙。