Exploring behavioral responses to a residential water tariff reform

Abstract

Water demand is often found to be relatively price-inelastic, with substantial percentages of water consumption irresponsive to price changes. This does not mean that households are insensitive to price changes or unresponsive to tariff reforms. In order to explore the latter, and using Latent Class Models, we have classified households into a series of distinct types according to how they switch between consumption tiers in response to changes in their water tariff. We then identified key drivers of this switching behavior, proposing that not only tariff-related variables but also sociodemographic, attitudinal, and information conditions define switching profiles. Our empirical exercise exploits information on water consumption and tariffs from 878 households in Granada (Spain) for the years 2010 and 2011 (when a new tariff structure was implemented), as well as a survey that collected additional information about households characteristics. • We classify households into five distinct groups base on their water consumption behavior after a tariff reform. • The group of households who reduce their consumption are more likely to be concerned about the environment. • The groups who are less likely underestimating their bill exhibit an inverse link between water prices and consumption. • The group predicted to be largest switched to a higher consumption tier, even though that led to an increase in their marginal price.