22 June 2008

Does Water Demand Slope Down?

WH sent me this inquiry:
I don't have is really concrete examples of communities in the US or elsewhere that have demonstrated how the proper pricing directly impacts usage. I've certainly seen plenty of examples of conservation rates being applied and maybe correlated to reductions in consumption but these are generally used in conjunction with other conservation initiatives and it can be hard to parse apart how much of water use reductions result from pricing versus sprinkling ordinances, high efficiency toilet rebates etc. If you could point me in the right direction I'd be grateful.
In section 3.13 of my dissertation, I discuss how 100% wholesale price penalties were effective in reducing demand from retail water agencies. I did not control for the simultaneous effects of (in)formal conservation, which requires econometrics. These papers do control for those effect, isolating and measuring price-elasticity, i.e., the percent reduction in water use that follows a one-percent price increase:

Nataraj, S. (2006). "Residential Water Demand: Estimating the Price Elasticity of Water Demand in Santa Cruz" Working Paper.

Mansur, E. T. & Olmstead, S. M. (2007). "The Value of Scarce Water: Measuring the Inefficiency of Municipal Regulations" Working Paper.

Does anyone have other examples from the academic or popular press?

Note that water managers held that price elasticity was zero (i.e, people do not respond to higher prices) until the early 1990s. Now they believe that it ranges from -0.3 for indoor use to -1.5 for outdoor use. Elasticities for farmers are even higher.

Bottom Line: Higher prices will reduce water use.

3 comments:

  1. The cost of water sure has motivated us to use less. We brought our desire for a flower and vegetable garden to Davis in the 1998 move from the cool, moist coast. Stunned by substantial water bills that first furnace-like summer, we began a course of capital investment in drip irrigation and automatic timers that run the water in the early AM. The technology has worked well for both the water bills and the garden, but the lawn has died. This winter we will continue this line of investment in drought tolerant grasses.

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  2. "Does anyone have other examples from the academic or popular press?"

    Over the years, there have been quite a few empirical studies of price elasticity of residential water demand. Elasticity estimates generally show a definite, but inelastic response to price.

    For example, see analysis and references cited in;

    M. Espey, et al. (1997) "Price Elasticity of Residential Demand for Water: A Meta Analysis" Water Resources Research 33 (6) 1369-74.

    S. Renzetti (2002) The Economics of Water Demands. Kluwer.

    R. Young 2005. Determining the Economic Value of Water:....Resources for the Future.

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  3. Another paper, looking at both pricing and mandatory restrictions during the Colo drought of 2002, via a very large residential customer dataset.

    And they found:

    Managers wishing to reign in the high users during drought, therefore, may be wise to focus on restrictions; whereas low water users are perhaps better targeted (if at all) with price modifications—although these users, by definition, have less opportunity to reduce consumption than others, and these price increases may therefore be more punitive than pragmatic.

    DS

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