1.5. Water privatization in South Africa has been guided by what the World Bank calls the “cost recovery” approach:

Water should be made available to people only if the company providing it can recover its costs plus a profit.

In 1995, private companies began taking over the provision of water in South Africa. By the early 2000s some cities saw water prices increase fourfold, millions of people had their water cut off, and outbreaks of cholera returned for the first time in decades.

a. Which of your textbook’s list of market failures apply to the privatization of water utilities in South Africa?

b. Is the failure so serious that it makes the private provision of water bad public policy?

c. If not, why not? If so, what policies would make more economic sense?