Household demand for water in sweden with implications of a potential tax on water use

Abstract

The purpose of this paper is to estimate empirically the effects of a water tax on water use and on the size and stability of the tax revenues. A tax exceeding value‐added tax can be motivated on efficiency grounds when there are environmental external costs of water use and when water is a scarce resource. A household demand function for water is estimated using community level data for 282 (out of 286) Swedish communities studied annually over the period 1980–1992. Static and dynamic demand functions are estimated using panel data methods. The results show a long‐run price elasticity of −0.10 in marginal price models and −0.20 in average price models. The findings imply that a tax of 1 Swedish Kronor (SEK) m−3 of water used (corresponding to a 5% increase in the mean average price) would generate ∼600 million SEK in tax revenues per year when levied on all households in Sweden. The water consumption would, however, only be reduced by ∼1%.