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Using Price Elasticities of Water Demand to Inform Policy

Author

Listed:
  • Ellen M. Bruno

    (Department of Agricultural and Resource Economics, University of California, Berkeley, California 94720-3310, USA)

  • Katrina Jessoe

    (Department of Agricultural and Resource Economics, University of California, Davis, California 95616, USA)

Abstract

This survey distills recent work on the price elasticity of demand for urban and agricultural water and outlines how it can inform the design of market-based approaches to manage increasingly scarce water resources. We offer a brief description of the water sector, including the primary users, main water sources, and market failures in the allocation and use of surface water and groundwater. A review of recent empirical research on the price elasticities of agricultural and urban water demand shows the progress made in our understanding of user response to prices and reveals substantial heterogeneity in the price response. We apply what we have learned about elasticities to surface water markets and price-based groundwater management. Heterogeneity in price elasticities suggests that water transfers may lead to large efficiency gains, but that their magnitude is site specific. Groundwater pricing may cost-effectively manage groundwater and fund the development of alternative water supplies, but heterogeneity in elasticity estimates highlights that the conservation and revenue generated are basin specific.

Suggested Citation

  • Ellen M. Bruno & Katrina Jessoe, 2021. "Using Price Elasticities of Water Demand to Inform Policy," Annual Review of Resource Economics, Annual Reviews, vol. 13(1), pages 427-441, October.
    • Handle: RePEc:anr:reseco:v:13:y:2021:p:427-441
    DOI: 10.1146/annurev-resource-110220-104549
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    Cited by:

    1. Bruno, Ellen M. & Jessoe, Katrina K. & Hanemann, Michael, 2023. "The Dynamic Impacts of Pricing Groundwater," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt2mx8q1td, Department of Agricultural & Resource Economics, UC Berkeley.
    2. Françeska Tomori & Erik Ansink & Harold Houba & Nick Hagerty & Charles Bos, 2024. "Market power in California's water market," American Journal of Agricultural Economics, John Wiley & Sons, vol. 106(3), pages 1274-1299, May.

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