A closer look at residential water demand elasticities in the short and long run

Abstract

Hotter, drier summers and population growth are causing water management challenges for water authorities in New Zealand. Effective long-term planning requires understanding the dynamics of household responses to demand management and climate variables. This paper analyses a large dataset of household-level demand data over nine years. Dynamic panel time series models are used to estimate short and long-term elasticities, interactions between demand management and climate variables, and associations with property characteristics. The general belief is that water demand becomes more sensitive to price changes over the long term compared to the short term. Yet, previous studies that directly compared long and short-run elasticities had limitations, as they imposed a constraint on the long-run estimate, assuming it to be larger. The models presented in this paper are more flexible and can identify the opposite scenario should it be present. We find long-run price elasticity may not be larger for new high-value properties or high-value properties with small gardens. Low-value properties have smaller short-run and larger long-run price elasticity. High-value properties respond more to outdoor restrictions and associated conservation messages than low-value properties. We discuss the policy implications of these findings.