43 Pages Posted: 13 Jan 2006
Date Written: January 2006
Rather than allowing water prices to reflect scarcity rents during periods of drought-induced excess demand, policy makers have mandated command-and-control approaches, like the curtailment of certain uses, primarily outdoor watering. Using unique panel data on residential end-uses of water, we examine the welfare implications of typical drought policies. Using price variation across and within markets, we identify end-use specific price elasticities. Our results suggest that current policies target water uses that households, themselves, are most willing to forgo. Nevertheless, we find that use restrictions have costly welfare implications, primarily due to household heterogeneity in willingness-to-pay for scarce water.
Keywords: Resource Allocation, Market-based Regulation, Residential Water Demand, Drought Policy
JEL Classification: I30, D10
Suggested Citation: Suggested Citation
Mansur, Erin T. and Olmstead, Sheila M., The Value of Scarce Water: Measuring the Inefficiency of Municipal Regulations (January 2006). AEI-Brookings Joint Center Working Paper No. 06-01. Available at SSRN: https://ssrn.com/abstract=875439 or http://dx.doi.org/10.2139/ssrn.875439