Water conservation and the common pool problem: Can pricing address free-riding in residential hot water consumption?

25 Pages Posted: 11 Oct 2021

See all articles by Mikael Elinder

Mikael Elinder

Uppsala University - Department of Economics; Research Institute of Industrial Economics (IFN)

Xiao Hu

Swedish University of Agricultural Sciences (SLU) - Center for Environmental and Resource Economics (CERE)

Che-Yuan Liang

affiliation not provided to SSRN

CERE Center for Environmental and Resource Economics

CERE

Date Written: October 4, 2021

Abstract

Water is an increasingly scarce resource. It is often distributed such that consumers do not face any marginal cost of consumption, creating a common pool problem. For instance, tenants in multi-family buildings can often consume both hot and cold water at zero marginal cost. Using high-frequency data over many years, we analyze how the introduction of apartment-level metering and billing (IMB) affects hot water consumption. We find that introducing a marginal cost, reflecting the market price, decreases consumption drastically by 26%. Hence, price interventions can curb free-riding behavior and help the conservation of cheap but precious resources. Our results also show that heavy water users in the top consumption quartile account for 72% of the reduction. Moreover, cost-benefit calculations indicate that IMB for hot water is a cost-effective policy tool for reducing water and energy consumption.

Keywords: Residential water consumption, water conservation, common pool problem, free-riding, individual metering and billing

JEL Classification: D12, Q21, Q25, Q28

Suggested Citation

Elinder, Mikael and Hu, Xiao and Liang, Che-Yuan and Center for Environmental and Resource Economics, CERE, Water conservation and the common pool problem: Can pricing address free-riding in residential hot water consumption? (October 4, 2021). Available at SSRN: https://ssrn.com/abstract=3935571 or http://dx.doi.org/10.2139/ssrn.3935571

Mikael Elinder

Uppsala University - Department of Economics ( email )

Box 513
Uppsala, 751 20
Sweden

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Xiao Hu

Swedish University of Agricultural Sciences (SLU) - Center for Environmental and Resource Economics (CERE) ( email )

Almas Allé 10
Umeå, 750 07
Sweden

Che-Yuan Liang

affiliation not provided to SSRN

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