Economic Analysis of Residential, Commercial, and Industrial Uses of Water in Sri Lanka

Abstract

The aim of this study is to provide an economic analysis of urban water use with a view to enhance the understanding of the factors influencing urban water demand and to estimate price elasticities of residential, commercial, and industrial water demands in Sri Lanka. Lack of research in the Sri Lanka context of this area and the need for understanding the price elasticity of demand for urban water for effective implementation of the new water-demand management policy formulated by the Government of Sri Lanka in early 2000 were important motivations for this study. Separate water-demand functions for each of the major sectors were estimated, using monthly time series for 60 months from January 1994 to December 1998. In general, the price is found to have a significant effect on water demand, and this effect is much higher for the industrial sector than for the residential and commercial sectors. In addition, real income, number of connections (population), and weather variables are found to be important determinants of urban water demand. Estimated price elasticities are -0.18, -0.17, and -1.34 for the residential, commercial, and industrial water demands, respectively. The study concludes that while the price will be an important tool in influencing demand, other measures such as public education and information/awareness will be necessary to achieve desired reductions in water consumption, especially in the less-responsive residential and commercial sectors.