Comparing price and nonprice approaches to urban water conservation

Abstract

Urban water conservation is typically achieved through prescriptive regulations, including the rationing of water for particular uses and requirements for the installation of particular technologies. A significant shift has occurred in pollution control regulations toward market‐based policies in recent decades. We offer an analysis of the relative merits of market‐based and prescriptive approaches to water conservation, where prices have rarely been used to allocate scarce supplies. The analysis emphasizes the emerging theoretical and empirical evidence that using prices to manage water demand is more cost effective than implementing nonprice conservation programs, similar to results for pollution control in earlier decades. Price‐based approaches may also compare favorably to prescriptive approaches in terms of monitoring and enforcement. Neither policy instrument has an inherent advantage over the other in terms of predictability and equity. As in any policy context, political considerations are also important.