Water Demand under Alternative Price Structures

44 Pages Posted: 28 Oct 2006

See all articles by Sheila M. Olmstead

Sheila M. Olmstead

LBJ School of Public Affairs; Resources for the Future

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)

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Abstract

We estimate the price elasticity of water demand with household-level data, structurally modeling the piecewise-linear budget constraints imposed by increasing-block pricing. We develop a mathematical expression for the unconditional price elasticity of demand under increasing-block prices and compare conditional and unconditional elasticities analytically and empirically. We test the hypothesis that price elasticity may depend on price structure, beyond technical differences in elasticity concepts. Due to the possibility of endogenous utility price structure choice, observed differences in elasticity across price structures may be due either to a behavioral response to price structure, or to underlying heterogeneity among water utility service areas.

Keywords: water demand, price elasticity, non-linear pricing

JEL Classification: Q21, Q25, Q28, L95, D12

Suggested Citation

Olmstead, Sheila M. and Hanemann, Michael and Stavins, Robert N., Water Demand under Alternative Price Structures. Journal of Environmental Economics and Management, Vol. 54, No. 2, 2007, AEI-Brookings Joint Center Working Paper No. 05-10, KSG Working Paper No. RWP05-039, Available at SSRN: https://ssrn.com/abstract=738466 or http://dx.doi.org/10.2139/ssrn.738466

Sheila M. Olmstead (Contact Author)

LBJ School of Public Affairs ( email )

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Michael Hanemann

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

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Robert N. Stavins

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

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Resources for the Future

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