Abstract
ABSTRACT: The traditional “requirements” approach to water system planning presumes perfectly inelastic demand and arbitrarily selects a fixed water requirement per capita per day as a planning target. Economists have often pointed out that such a policy leads to over‐investment in water supply facilities; a superior approach would maximize some measure of net benefits incorporating price‐sensitive demand. Using a dynamic programming model to depict an investment problem in Rhode Island, we find that ambiguities about how to incorporate price‐sensitive demand into a decision framework may make such an approach as arbitrary as the requirements approach. Water conservation responses may be a function of other social parameters than water price; if so, variations in these social parameters should be regarded as economic alternatives to water supply investments.
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