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Price-setting for Residential Water: Estimation of Water Demand in Lahore

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  • Tamkinat Rauf

    (Economic Analysis Department, State Bank of Pakistan, Karachi.)

  • M. Wasif Siddiqi

    (Government College university, Lahore.)

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    Abstract

    The Water and Sewerage Agency (WASA) of Lahore is facing soaring demand and rising costs. But while massive investments are made to augment supply, tariffs remain low and are not adjusted in line with growing expenses. This has resulted not only in heavy and increasingly unsustainable reliance on loans and subsidies, but also in consumers undervaluing the resource, resulting in its inefficient utilisation. In this scenario, water tariffs badly need to be reformed. This study explores the potential of a pricing policy to regulate residential water demand in order to achieve the objectives of cost recovery, efficient water use, and equitable allocation of water resources. To this end, a demand function is estimated using household level data about water consumption and socio-economic characteristics of 156 households supplied by WASA, Lahore, for the period 2004-2006. Under block-rate tariffs the price variable is endogenously determined and a system of simultaneous equations emerges, solved here using two-stage least squares method. The estimated model explains 57 percent variation in water demand. The study finds water demand to be inelastic to price and, considering WASA’s exceedingly low tariffs, recommends up to 50 percent increase in the current tariff structure. Further computations show that a 50 percent increase will not endanger lifeline water supply. However, tariff increases may not be felt uniformly across all income groups, and absence of income data remains a limitation of this study. The study also recommends linking the non-volumetric part of tariffs to wealth-determined variables, such as property value and income.

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    Bibliographic Info

    Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

    Volume (Year): 47 (2008)
    Issue (Month): 4 ()
    Pages: 893-906

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    Handle: RePEc:pid:journl:v:47:y:2008:i:4:p:893-906

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    Related research

    Keywords: Water Demand; Price-setting;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Joseph V. Terza & W. P. Welch, 1982. "Estimating Demand under Block Rates: Electricity and Water," Land Economics, University of Wisconsin Press, vol. 58(2), pages 181-188.
    2. Michael L. Nieswiadomy & David J. Molina, 1991. "A Note on Price Perception in Water Demand Models," Land Economics, University of Wisconsin Press, vol. 67(3), pages 352-359.
    3. R. A. Batchelor, 1975. "Household Technology and the Domestic Demand for Water," Land Economics, University of Wisconsin Press, vol. 51(3), pages 208-223.
    4. Mary E. Renwick & Sandra O. Archibald, 1998. "Demand Side Management Policies for Residential Water Use: Who Bears the Conservation Burden?," Land Economics, University of Wisconsin Press, vol. 74(3), pages 343-359.
    5. Céline Nauges & Alban Thomas, 2000. "Privately Operated Water Utilities, Municipal Price Negotiation, and Estimation of Residential Water Demand: The Case of France," Land Economics, University of Wisconsin Press, vol. 76(1), pages 68-85.
    6. Lars Gårn Hansen, 1996. "Water and Energy Price Impacts on Residential Water Demand in Copenhagen," Land Economics, University of Wisconsin Press, vol. 72(1), pages 66-79.
    7. Henry S. Foster, Jr. & Bruce R. Beattie, 1979. "Urban Residential Demand for Water in the United States," Land Economics, University of Wisconsin Press, vol. 55(1), pages 43-58.
    8. World Bank, 2006. "Property Taxes in the Punjab, Pakistan," World Bank Other Operational Studies 8277, The World Bank.
    9. Boiteux, M., 1971. "On the management of public monopolies subject to budgetary constraints," Journal of Economic Theory, Elsevier, vol. 3(3), pages 219-240, September.
    10. Julie A. Hewitt & W. Michael Hanemann, 1995. "A Discrete/Continuous Choice Approach to Residential Water Demand under Block Rate Pricing," Land Economics, University of Wisconsin Press, vol. 71(2), pages 173-192.
    11. James J. Opaluch, 1982. "Urban Residential Demand for Water in the United States: Further Discussion," Land Economics, University of Wisconsin Press, vol. 58(2), pages 225-227.
    12. Michael L. Nieswiadomy & David J. Molina, 1989. "Comparing Residential Water Demand Estimates under Decreasing and Increasing Block Rates Using Household Data," Land Economics, University of Wisconsin Press, vol. 65(3), pages 280-289.
    13. David L. Chicoine & Ganapathi Ramamurthy, 1986. "Evidence on the Specification of Price in the Study of Domestic Water Demand," Land Economics, University of Wisconsin Press, vol. 62(1), pages 26-32.
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