Modeling nonlinear water demand : The case of Tunisia

The main originality of this paper is to empirically examine the presence of nonlinear mechanism in the residential water consumption equation. Within logistic smooth transition framework (LSTR), we explore the existence of nonlinearity with respect to water price changes in progressive tariff. We use quarterly time series for the period 1980-2007 which describes residential water consumption and its main determinants in Tunisia which apply an increasing multi-step water pricing scheme. Our results provide strong evidence that water consumption respond nonlinearly to price changes for two considered consumption blocks, that is, the price elasticity is higher when water price surpasses some threshold of water price variation. The price elasticity of the small consumers is superior to its counterpart of the big consumers and the residential demand is elastic to its price only for the lower block in high price change regime. Consequently, we propose to increase the length of the lower block of consumption to achieve goals of social equity. We also recommend to increase the tariff progressivity to promote water saving at least for the upper block's consumers