Muffled Price Signals: Household Water Demand under Increasing-Block Prices

Abstract

In many areas of the world, including large parts of the United States, scarce water supplies are a serious resource and environmental concern. The possibility exists that water is being used at rates that exceed what would be dictated by efficiency criteria, particularly when externalities are taken into account. Because of this, much attention has been paid by policy makers and others to the use of demand management techniques, including requirements for the adoption of specific technologies and restrictions on particular uses. A natural question for economists to ask is whether price would be a more cost-effective instrument to facilitate water demand management. As a first step in such an investigation, this paper draws upon a newly-available set of detailed data to estimate econometrically the demand function for household use of urban water supplies. We analyze cross-sectional time-series data that track 1,082 single-family households served by 16 water utilities in 11 urban areas in the United States and Canada. Because of the diverse multiple-block pricing structures that abound, estimating the effects of price and price structure on residential water demand poses some challenging and interesting problems. We find that the sensitivity of residential water demand to price is quite low, and that the effect of price structure may be more influential than the magnitude of marginal price itself. The household-level data we use allow us to assess the influences on residential water demand of climate, sociodemographic factors, and characteristics of housing stock, including home vintage. Our results indicate substantial heterogeneity in likely household responses to utility demand-management policies.