Muffled Price Signals: Household Water Demand Under Increasing-Block Prices
Sheila M. Cavanagh, W. Michael Hanemann, Robert N. Stavins
Climate Change and Sustainable Development
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 given by policy makers and others to the use of various techniques of demand management, 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 effective instrument to facilitate efficient management of water resources. 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. Because of the diverse multiple-block pricing structures that abound, estimation of this relationship poses some challenging and interesting problems.