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

53 Pages Posted: 17 Jul 2002

See all articles by Sheila M. Cavanagh

Sheila M. Cavanagh

Harvard University - Harvard Kennedy School (HKS)

W. Michael Hanemann

University of California, Berkeley - The Richard & Rhoda Goldman School of Public Policy

Robert N. Stavins

Harvard University - Harvard Kennedy School (HKS); Resources for the Future; National Bureau of Economic Research (NBER)

Date Written: June 2002

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.

Suggested Citation

Cavanagh, Sheila M. and Hanemann, Michael and Stavins, Robert N., Muffled Price Signals: Household Water Demand Under Increasing-Block Prices (June 2002). Available at SSRN: https://ssrn.com/abstract=317924 or http://dx.doi.org/10.2139/ssrn.317924

Sheila M. Cavanagh

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1417 (Phone)

Michael Hanemann

University of California, Berkeley - The Richard & Rhoda Goldman School of Public Policy ( email )

School of Natural Resources
327 Giannini Hall
Berkeley, CA 94720
United States
510-642-2670 (Phone)
510-642-3345 (Fax)

Robert N. Stavins (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1820 (Phone)
617-496-3783 (Fax)

Resources for the Future

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National Bureau of Economic Research (NBER) ( email )

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