The Demand for Water: Consumer Response to Scarcity (original) (raw)
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Western municipal water conservation policy: The case of disaggregated demand
Water Resources Research, 2005
1] We investigate aspects of the felicity of both incentive-based and command and control policies in effecting municipal water conservation goals. When demand can be disaggregated according to uses or users, our results suggest that policy efforts be focused on the submarket wherein demand is more elastic. Under plausible consumer parameters, a household production function approach to water utilization prescribes the nature of demand elasticities in alternative uses and squares nicely with empirical results from the literature. An empirical example illustrates. Overall, given data and other informational limitations, extant institutional structures, and in situ technology, our analysis suggests a predisposition for command and control policies over incentive-based tools.
The Effects of Policy Announcement, Prices, and Subsidies on Water Consumption
SSRN Electronic Journal
With increasing water security challenges, water utilities around the world face complex decisions on water supply and demand management. Here we investigate the effects of price and subsidy increases on water conservation in Singapore. Using anonymized monthly billing data on water consumption for 2.2 million residential accounts over 10 years, our difference-indifferences estimates show that the announcement of a two-phased 30% price increase reduces water consumption by 3.7% more for the public housing, relative to the private apartments. The announcement effect is larger than the implementation of price increase. Consumers with lower water usage respond more to the announcement of price hike, while consumers with higher usage respond more to its implementation. An increase in utility subsidy reduces low-income households' financial burden but does not affect water consumption, possibly due to consumers' low attentiveness to the subsidy change. The results suggest that the traditional market-based policy instruments, such as price and subsidy, could be combined with attention priming to achieve sustainable outcomes with minimal requirement on technology advancement and institutional innovation. Cities worldwide are facing increasing water security challenges due to misalignment between rising water demand and declining resource availability. Supply-side solutions often involve costly infrastructure development and technology advancement. As such, a wide range of policy instruments have been implemented to reduce water demand, including rationing, mandated technology, efficiency rebate, education, social norms and so on. Water pricing, however, has not been integrated into the portfolio of measures by many utilities and regulators, despite its cost-effectiveness 1-4 and ease of implementation 5 , due to low price elasticity of water and the welfare implications of pricing policies 6. The effectiveness of price as a lever of water demand depends on its elasticity. Traditionally, residential water consumers exhibit low price elasticity of demand 7-9. This has been attributed to the lack of information and understanding on price and quantity consumed 10,11. On the price side, study has shown that not including price information in the bill could reduce price elasticity by 30% or more 10. The non-linear structure of increasing block rate, the most common water tariff structure, could make it difficult to accurately understand price information 9,12,13. Furthermore, inattention to price and its components 14 , and automatic payments 15,16 , may also obscure price signals. On the quantity consumed, passive tracking of water use, as a result of infrequent billing 17,18 and systematically biased beliefs (that is, underestimation of water use) 19-22 , prevents consumers from adjusting consumption according to price changes. Given the above, research has shown that improved understanding of price 13 and water usage 11,17,18,21 could both increase price elasticity of demand for residential water, therefore improving the effectiveness of pricing policies. However, effective pricing policy in water conservation raises concerns on its potential regressive distributional effect. As low-income households spend a greater proportion of their income on water, they may be disproportionately affected by price increase 5,23. To address the potentially regressive distributional effects, utility subsidies of
Limits of pricing policy in curtailing household water consumption under scarcity conditions
Water Policy, 2008
A key policy question in designing urban water policy and institutional reforms is: what should be the appropriate structure of water charges to ensure long-term sustainability of water service? This is because water pricing touches on equity and on the willingness of the consumer to pay, but more on its affordability. This study focuses on understanding the nature of household demand for water, and attempts to express the household demand functions. A panel of data of 10,564 complete observations on water bills, drawn from a household expenditure survey conducted in 2003, is used to estimate domestic water demand function. Price and other dummy variables were used in the analysis and the results discussed. Specifically, the household water demand and the per capita demand are analysed, taking into consideration such variables as marginal price, rate structure premium and level of household income. The results show that the estimated water demand is inelastic and so is the income elasticity. The effect of the findings on water policy making in regard to pricing is cited. Limitations of price effectiveness as a tool to curtail water consumption are highlighted.
Estimating water demand using price differences of wastewater services
2020
Many homes in Hawai'i use cesspools and other on-site disposal systems (OSDS) instead of the municipal sewer system. Because bills combine water and waste-water services, and homes with OSDS do not pay for sewer service, OSDS residences have lower monthly bills compared to those with sewer-connected systems. We use this price difference in conjunction with selection on observables and matching methods to estimate the price elasticity of residential water demand. Matching methods indicate that OSDS residences have systematically different characteristics than those with sewer-connected systems, suggesting an imperfect natural experiment. We show traditional methods lead to biased elasticity estimates, even though they are robust when selecting on observables using OLS with or without census tract fixed effects, census block fixed effects, and non-parametric controls trained using cross-validation and a lasso. We then estimate demand using a limited sample of OSDS homes that have sewer-connected neighbors, which gives estimates from −0.06 to −0.08. The neighbors have no systematic differences in other characteristics and estimates are robust to further selection on observables, but the sample differs slightly from population means in their physical characteristics. These more defensible demand elasticity estimates, however, are much more inelastic than estimates not based on comparison of neighbors and are generally more inelastic than previous studies. Taken collectively, the results highlight the susceptibility of demand estimates to omitted variable bias. Highly inelastic water demand suggests that considerably higher prices may be needed for sustainable water management, creating some practical challenges under current regulatory guidance. We also use our results to estimate willingness to accept a tax credit for upgrading an OSDS system, a targeted policy that aims to improve water quality. Regardless of whether consumers respond to average or marginal prices, our estimates imply that the tax credit is far too small to induce voluntary participation in the program. Additional consumer welfare topics are also considered.
Review of Policy Research, 2004
Water conservation policy is a natural laboratory for addressing general issues of relevance to policy analysis and public administration, particularly the relative effectiveness of policies in changing human behavior. Using multivariate regression analysis of a dataset comprised of more than 200,000 monthly observations of more than 19,000 household accounts over six years, this paper makes three main contributions. First, it contributes to the substantive area of water conservation policy by analyzing what works. Second, it contributes to our understanding of generic policy instruments. Third, it raises an important issue regarding standard assumptions about selection bias. The results support earlier work warning that offsetting behavior can negate engineering solutions to policy problems, but further indicate that adding communication to engineering solutions can create cooperation that overcomes offsetting behavior. They also provide evidence that appropriate regulation can be effective, and that pricing can be effective even when price elasticities of demand are low.
Heterogeneous responses to price: Evidence from residential water consumers
Journal of Environmental Economics and Management, 2021
Public utilities may respond to demand or supply fluctuations by adjusting prices to ration quantity. This approach's efficacy and distributional impacts depend on households' heterogeneous price sensitivity, which we estimate in a market for residential water usage. Our household-level panel data features a large change in marginal water prices and a novel measure of local hydrological stress. Contrary to prior research, we find that heavy-usage households are more price sensitive than other households, and price elasticity is largely invariant to household wealth. * The authors thank Orange Water and Sewer Authority (OWASA) for the use of their data and support, as well as Greg Characklis, Larry Band, Jeffrey Hughes, and Valentin Verdier for helpful comments and suggestions. Financial support was provided by a National Science Foundation grant WSC-1360442: "Designing Robust and Adaptive Water Management Strategies in Regions Transitioning from Abundance to Scarcity." This study was approved by the University of North Carolina IRB (study number 17-2945). OWASA reviewed this paper solely to ensure that we complied with the terms of our confidentiality agreement, which covered the protection of personal information on individual OWASA customers. water demand seasonal elasticities: a stone-geary model under an increasing block rate structure." Land Economics, 93(4): 608-630.
1999
This paper develops a model of residential water demand under a nonlinear budget constraint. The theoretical model for an individual consumer is adapted to yield an aggregate model that preserves the structure of the individual demand function, and that can be used with aggregate (water district level) data. The model is used to study the influence of pricing and non-price conservation programs on consumption and conservation behavior in three water districts in the San Francisco Bay Area, over a 10-year period that includes both drought and normal years. Empirical results show that pricing can be effective in reducing water consumption, particularly during the annual dry season, and during longer drought episodes. The effect is mitigated when non-price conservation programs are included in the analysis. Among these, use restrictions and landscaping audits appear to be particularly effective in inducing conservation.
RePEc: Research Papers in Economics, 1999
In this paper, a basic theoretical model of residential water consumption that adequately represents consumer behavior when facing a nonlinear budget constraint is developed. The theoretical model for an individual consumer is adapted to yield an aggregate model that essentially preserves the structure of the demand function for the individual. The model is used to study the influence of prices and nonprice conservation programs on consumption and conservation behavior in three water districts in the San Francisco Bay Area. The empirical results show that pricing can be an effective tool in reducing water consumption but, when the influence of conservation programs is controlled for, the pricing effect is mitigated. Use restrictions and landscaping audits appear to be particularly effective in inducing conservation from consumers.