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Effect of price information on residential water demand

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  • S. Gaudin
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    Abstract

    Microeconomic theory predicts that people decrease consumption when price increases, the magnitude of the effect depending on price elasticity. The law of demand, however, implicitly assumes that consumers know prices, an assumption that is not always satisfied in markets with ex post billing. When prices are not transparent, elasticity estimates are potentially lower than their full information potential. Evidence of low price elasticity abounds in residential water demand studies, limiting the effectiveness and desirability of using price signals as a conservation tool. It is hypothesized that resident's sluggish response to price is partly due to the absence of price information on water bills. Differences in the informational content of bills are documented for the first time on the basis of sample bills collected from 383 utilities across the USA. A standard aggregate water demand model is augmented with qualitative variables describing differences in billing information, allowing such variables to affect the intensity with which consumers respond to price signals. No evidence is found that non-price information items affect price elasticity but there is a statistically significant effect in the case of price-related information; in our sample, price elasticity increases by 30% or more when price information is given on the bill.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840500397499
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    Bibliographic Info

    Article provided by Taylor and Francis Journals in its journal Applied Economics.

    Volume (Year): 38 (2006)
    Issue (Month): 4 ()
    Pages: 383-393

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    Handle: RePEc:taf:applec:v:38:y:2006:i:4:p:383-393

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    References

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    1. Roberto Martinez-Espineira & Celine Nauges, 2004. "Is all domestic water consumption sensitive to price control?," Applied Economics, Taylor and Francis Journals, vol. 36(15), pages 1697-1703.
    2. R. Martínez-Espiñeira, 2003. "Estimating Water Demand under Increasing-Block Tariffs Using Aggregate Data and Proportions of Users per Block," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 26(1), pages 5-23, September.
    3. Sylvestre Gaudin & Ronald C. Griffin & Robin C. Sickles, 2001. "Demand Specification for Municipal Water Management: Evaluation of the Stone-Geary Form," Land Economics, University of Wisconsin Press, vol. 77(3), pages 399-422.
    4. Isamu Matsukawa, 2004. "The Effects of Information on Residential Demand for Electricity," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-18.
    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.
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    Cited by:
    1. Sheila M. Olmstead & Robert N. Stavins, 2008. "Comparing Price and Non-price Approaches to Urban Water Conservation," Working Papers 2008.66, Fondazione Eni Enrico Mattei.
    2. Dinusha Dharmaratna & Edwyna Harris, 2010. "Estimating Residential Water Demand using the Stone-Geary Functional Form: the Case of Sri Lanka," Monash Economics Working Papers 46-10, Monash University, Department of Economics.
    3. R. Quentin Grafton & Michael B. Ward & Hang To & Tom Kompas, 2011. "Determinants of Residential Water Consumption: Evidence and Analysis from a Ten-country Household Survey," Crawford School Research Papers 1114, Crawford School of Public Policy, The Australian National University.
    4. Schleich, Joachim & Hillenbrand, Thomas, 2009. "Determinants of residential water demand in Germany," Ecological Economics, Elsevier, vol. 68(6), pages 1756-1769, April.
    5. Nauges, Celine & van den Berg, Caroline, 2006. "Water markets, demand, and cost recovery for piped water supply services : evidence from Southwest Sri Lanka," Policy Research Working Paper Series 3941, The World Bank.
    6. Sheila M. Olmstead, 2010. "The Economics of Managing Scarce Water Resources," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 4(2), pages 179-198, Summer.
    7. Griffin, Ronald C. & Mjelde, James W., 2011. "Distributing water's bounty," Ecological Economics, Elsevier, vol. 72(C), pages 116-128.
    8. Sheila Olmstead & W. Michael Hanemann & Robert N. Stavins, 2007. "Water Demand Under Alternative Price Structures," NBER Working Papers 13573, National Bureau of Economic Research, Inc.
    9. Worthington, Andrew C., 2010. "Commercial and Industrial Water Demand Estimation: Theoretical and Methodological Guidelines for Applied Economics Research/Estimación de la demanda de agua comercial e industrial: pautas teóricas y," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 28, pages 237-258, Agosto.

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