The Interaction of Water Restriction and Pricing Policies: Econometric, Managerial and Distributional Implications

Abstract

Abstract Price increases and water use restrictions are two common policy instruments used to reduce water demand during drought. Previous studies have either ignored one of the policies or treated each as independent of the other. We show, theoretically and empirically, that these policies interact in a nontrivial way. Ignoring this interaction has implications for both the estimation of programme effectiveness, as well as the use of existing estimates by practitioners. Using 1997–2005 data from roughly 10000 households, we estimate the impact of both policies on demand accounting for their interaction. The analysis suggests that failure to account for the interaction will result in biased estimates of programme effectiveness; the magnitude and sign differ depending on scale and timing of the policies. Moreover, ignoring the interaction, when applying existing estimates, will result in an overestimate of potential water savings from the policies. Results also provide new insight into “who bears the conservation burden”.