Day Zero lessons

The hidden trade-offs between efficiency and equity

She did not bother to move to the sink, knowing that the taps would be empty. The microwave clock read 05:18 – forty minutes before the water truck came. Nothing until then. Inside the fridge was a jar of gherkins. She unscrewed the lid of the jar, drank down the brine, closing her mouth against its solids.

These unsettling words come from Karen Jennings’s remarkable novel, Crooked Seeds, recently longlisted for the 2025 Women’s Prize for Fiction.¹ They describe a Cape Town struggling through Day Zero, a city without water, where municipal taps are bone-dry and citizens rely desperately on morning deliveries from trucks – if they come at all. Jennings’ depiction is fictional, but not far from reality. Seven years ago, Cape Town stared directly at a similar disaster, when after years of drought, the dams were almost empty and the city prepared to turn off its taps.

Day Zero never arrived, but the threat was a wake-up call, prompting residents to rapidly reduce their water usage. A remarkable new paper by five economists carefully analyses how Capetonians responded during that crisis. The results they document not only help us understand human behaviour under scarcity but also highlight a fundamental lesson at the heart of welfare economics: the uncomfortable trade-offs between equity and efficiency.

In their analysis, the researchers find something both impressive and troubling. When faced with strict rationing and escalating water tariffs, wealthier households responded dramatically. They invested heavily in private adaptation strategies – installing rain tanks and drilling boreholes to access groundwater – cutting their municipal water use significantly. On the surface, this seems ideal: the city’s overall water consumption dropped sharply, staving off disaster.

But this adaptation was costly in a way less immediately visible. Wealthy households reduced their reliance on the public water supply, shrinking the city’s water revenue precisely when the municipal system needed funds most desperately. To maintain infrastructure and recover lost revenue, tariffs had to remain high – burdening the poorer households who could not afford private wells. An intended policy designed for equity – higher tariffs on heavy users – unexpectedly became regressive. The richest residents adapted; the poorest had few alternatives.

Worse still, this private drilling caused a silent crisis below the surface: groundwater depletion. The wealthiest neighbourhoods saw groundwater extraction rates comparable to some of the world’s most stressed aquifers. It was a textbook example of the Tragedy of the Commons: when individually rational decisions lead to collectively disastrous outcomes. Each household, acting in its own best interest, drilled deeper to secure its own water supply. But as more boreholes tapped into the same underground reserves, the rate of depletion accelerated. Efficiency, measured as water saved, was achieved; equity suffered.

This real-life dilemma is precisely what welfare economics tries to untangle. No one understood that better than Johannes de Villiers Graaff, the South African economist whose work on welfare economics became foundational. Graaff, born in 1928 in Cape Town, was deeply familiar with South Africa’s stark inequalities. In his influential book Theoretical Welfare Economics, he argued that an economy might be perfectly efficient – no resources wasted – but still deeply unfair. Efficiency alone, Graaff said, was no guarantee of a just society. You could allocate resources optimally according to market signals, yet leave many without even basic necessities. Conversely, pursuing equity aggressively – perhaps by nationalising resources or heavily subsidising the poor – could lead to severe inefficiencies, shrinking the total available resources.

Graaff’s contribution was to formalise the uncomfortable truth that efficiency and equity are often trade-offs on the spectrum of policy decisions. He provided economists with a toolkit to measure these trade-offs explicitly. But he also insisted – like Paul Samuelson notes warmly in his introduction to Graaff’s 1967 book – that these were ultimately questions of societal values. Economics could illuminate the consequences, but society had to choose.²

Let’s return briefly to Cape Town. The paper’s findings highlight that policymakers eventually recognised the equity costs of private adaptation. Adjustments followed: tariffs were redesigned to increase free water allocations for poorer households, while regulations curtailed unmonitored boreholes. The city attempted, imperfectly but earnestly, to find the delicate balance Graaff urged between efficiency (conserving water) and equity (protecting vulnerable residents).

Yet this tension remains everywhere, in South Africa and beyond. Consider electricity, another scarce commodity. Richer households respond to load-shedding by installing private solar panels and batteries, reducing their dependence on Eskom. This again is efficient individually – fewer consumers to strain the grid – but reduces revenue for public utilities, leaving poorer households paying higher relative tariffs. A similar story repeats in health care or land reform, where equity-driven interventions without efficiency considerations risk collapse, and purely efficiency-driven reforms risk injustice. Welfare economics, as Graaff showed, clarifies these trade-offs: it forces us to acknowledge explicitly whom we prioritise and at what cost.

Samuelson, who won a Nobel in 1970, remarked that welfare economics would have looked vastly different had Graaff chosen to remain at Cambridge rather than returning to farm apples in the Koue Bokkeveld mountains. There is little doubt that Graaff would have won a Nobel had he done so. But he made a different choice – one that traded academic prestige for a life shaped by practical realities, a decision that itself reflected the very trade-offs at the heart of welfare economics.

The genius of Graaff was to remind us that economics cannot dictate our moral choices, but it can make the consequences of our choices painfully clear. There is no perfect answer: economics would not tell us exactly how much we should value equity compared to efficiency. But it shows clearly what happens when we lean too heavily towards one, forgetting the other.

Perhaps this is Graaff’s greatest legacy. Welfare economics offers no easy answers, only sharper tools to grapple with those impossible trade-offs. In a drought, a pandemic or an economic shock, it is rarely the privileged who suffer most. Yet policies that fail to appreciate hidden burdens, hidden costs and hidden adaptations might inadvertently widen the gaps they seek to close. As Jennings reminds us in Crooked Seeds, some carry burdens others will never notice – because they have never had to.

Good economics, then, is about anticipating these hidden burdens, weighing them carefully and striving for that uneasy but essential equilibrium between efficiency and fairness. When we fail to, economics has a way of revealing the truths we would rather ignore, nudging us, hopefully, toward better choices on our long walk to economic freedom.

An edited version of this article was published on News24. Support more such writing by signing up for a paid subscription. The images were created with Midjourney v6.

1. Until she joined North-West University at the start of the year, Karen was a writer-in-residence at LEAP.

2. Given how topical VAT is today, it’s worth noting that in the 1980s, Graaff was the leading intellectual on the Margo Commission, which reformed South Africa’s tax system. His influence helped shape the decision to shift towards a more efficient indirect tax – paving the way for the adoption of VAT.