06 June 2012

Water prices, useless consultants and incentives

At the IWA, I gave a talk on global water tariffs (paper in press), during which time I presented a price elasticity estimate of -0.37 (meaning that a 10% increase in the price of retail water led to a -3.7% decrease in quantity demanded).

Here's the 17 min MP3 of my talk and my slides [PDF]

In my talk I concluded that "prices can have an impact on demand for water," so it was funny when Andrea Moisello presented far more data on water prices and demand in Italy and an estimated elasticity of -0.45 before concluding that "price changes are too weak to have an effect."

First, that's false, by the definition of an elasticity that's not zero. Second, he seemed interested in drawing that conclusion despite the evidence in front of his face.

When I went home that night and told this story to my hosts (Ireland does not currently charge for water), they did not agree with Andrea. "Of course you will use less water if you have to pay for it -- and even less if it's expensive."

Problem solved, so we had beers...

In other presentations, I took these notes:
  • Some people from IBM and CDM gave a sales pitch dressed up as plenary. They claimed that they could manage lots of data. I was more worried that they'd collect lots of data (plus fat fee$) and then mismanage the system and/or fail to consider the importance of institutions and incentives.

  • Someone pointed out that it's cheaper to pay a water/toilet attendant to protect facilities   -- and customers -- from abuse than it is to install new sources. Lifetime budgeting would take the costs of breakage and benefit from staffing (job creation!) into account.

  • A survey of women in Zambia showed that they were more aware of NGOs than local institutions. This is a FAIL, since NGOs spend more money on self-promotion without having a long-term role in the area.

5 comments:

Janice Beecher said...

I cannot count the number of times I have encountered this. There is a persistent "belief" that prices don't work or won't work, when in most cases no real attempt has been made to price accurately. At one event, I responded by saying that "repealing the laws of supply and demand are beyond the scope of this panel."

Mr. Kurtz said...

Here is an interesting price story, with implications for tax policy as well: I park my motorcycle on the street in San Francisco, where there is a half-block long set of spaces designated for this purpose. The City in it wisdom doubled the hourly charge to 50 cents per hour about a year ago (higher than neighboring private garages). Usage plummeted, meters were vandalized, and city revenues from this venue dried up. Amazing to say, they just reduced the rate to 30 cents per hour, and the spaces are filled up again. Not only do prices work, at some point revenues fall when taxes are raised. I guess you have to be some sort of Nobel Prize winner to find this a revelation.

Rob Steiner said...

Great presentation (link to slides is broken though). Have you take nyour research to the next level and looked at specific water rate structures? While there aren't many in place yet, it would appear that the next generation of allocation-based/budget-based billing have an even higher price elasticity rate, but that may be due to the huge amount of education/outreach that is done when launching these structures, rather than just "higher rates."

Janice Beecher said...

ps - I also think the positive income elasticity "appears" to overwhelm negative price elasticity.

David Zetland said...

@Rob -- link fixed, and agree with your observation on "outreach-elasticity". I do NOT favor budget rates, since they are too complicated to get right. Just charge $x per unit of water and raise the price when it's scarce (like gas).

@Jan -- Agreed. My elasticity estimate, btw, controlled crudely for income :)