Do Increasing Block Rate Water Budgets Reduce Residential Water Demand? A Case Study in Southern California (original) (raw)
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The authors thank the Eastern Municipal Water District of southern California for providing research funding and access to the water consumption and pricing data, Elizabeth Lovsted and Kristian Barrett of EMWD for help with interpreting and augmenting the dataset, and Erik Duran and Diti Chatterjee for essential database management. Any remaining errors are the authors' responsibilities.
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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.
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Changes in water availability, and hence price, are expected to be amongst the most disruptive effects of climate change in many parts of the world. Understanding the capacity of society or consumers to adapt to such changes requires understanding the responsiveness of water demand to price changes. We estimate the price elasticity of residential water demand in Phoenix, Arizona, which is likely to be strongly impacted by climate change. Most existing approaches to the estimation of water demand functions have limited capacity to isolate the effect of price on water consumption where there is little variation in water price. A recent study by attempts to address this issue by using differences in consumption levels, and weather-related characteristics to isolate the price effect on water demand, and by using a constant term in a differenced regression model. We also estimate a differenced regression model, but include direct measures of changes in water prices. This inclusion successfully isolates the price effect on water demand, and enables us to distinguish between the short-and long-run price elasticity of water demand, and hence the short-and long-run adaptation to changes in water availability.
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We estimate residential water demand for Mexico´s Northern Border state of Nuevo LeA³n using data from the National Household Survey. Employing Shin's (1985) price perception model and instrumental variables (IV) techniques to deal with simultaneity problems, our findings indicate that households in the region respond to a ‘perceived' price which is considerably lower than actual water prices. Elasticity estimates for price and income are consistent with theory and previous findings in the literature.
Changes in water availability, and hence price, are expected to be amongst the most disruptive effects of climate change in many parts of the world. Understanding the capacity of society or consumers to adapt to such changes requires understanding the responsiveness of water demand to price changes. We estimate the price elasticity of residential water demand in Phoenix, Arizona, which is likely to be strongly impacted by climate change. Most existing approaches to the estimation of water demand functions have limited capacity to isolate the effect of price on water consumption where there is little variation in water price. A recent study by attempts to address this issue by using differences in consumption levels, and weather-related characteristics to isolate the price effect on water demand, and by using a constant term in a differenced regression model. We also estimate a differenced regression model, but include direct measures of changes in water prices. This inclusion successfully isolates the price effect on water demand, and enables us to distinguish between the short-and long-run price elasticity of water demand, and hence the short-and long-run adaptation to changes in water availability.
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
Can Allocation-Based Water Rates Promote Conservation and Increase Welfare? A California Case Study
Water Economics and Policy, 2019
An allocation-based rate (ABR) is a special type of increasing block rate (IBR) price structure that is receiving increased attention from urban water suppliers in places like California where population growth and climate change continue to increase water scarcity. Previous work by Baerenklau et al. [Baerenklau, KA, KA Schwabe and A Dinar (2014a). Allocation-based water pricing promotes conservation while keeping user costs low. Agricultural and Resource Economics Update, 17(6), 1–14; Baerenklau, KA, KA Schwabe and A Dinar (2014b). The residential water demand effect of increasing block rate water budgets. Land Economics, 90(4), 683–699.] investigates the conservation potential of ABR and finds that consumption under ABR was 10–15% below that of a comparable uniform rate structure for a southern California case study. This paper extends that work by using the discrete–continuous choice framework to estimate household-level welfare effects of ABR for the same dataset. We find that d...