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Estimating Water Demand in Urban Indonesia: A Maximum Likelihood Approach to block Rate Pricing Data


Author Info

  • Piet Rietveld

    (Vrije Universiteit Amsterdam)

  • Jan Rouwendal

    (Landbouwuniversiteit Wageningen)

  • Bert Zwart

    (Vrije Universiteit Amsterdam)


In this paper the Burtless and Hausman model is used to estimate water demand in Salatiga, Indonesia. Other statistical models, as OLS and IV, are found to be inappropiate. A topic, which does not seem to appear in previous studies, is the fact that the density function of the loglikelihood can be made arbitrary high if observations are located exactly on a kink of the budget constraint. To avoid this problem, a discretization technique is used to work with genuine probabilities. The unconditional distribution of water demand is explored with parametric and semiparametric techniques. An important conclusion is that the distribution of water demand is not unimodal and that data are clustered aroundkinks. Main estimation results are a price elasticity of approximately -1.2 and an income elasticity of 0.05. Price and income elasticities are mutually dependent. The estimated model is finally used to investigate consequences for social welfare when a uniform price level is chosen. It is argued that without loss of total welfare, the complex rate structure can be replaced by a uniform marginal price.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 97-072/3.

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Date of creation: 03 Jul 1997
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Handle: RePEc:dgr:uvatin:19970072

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Keywords: Nonlinear budget constraints; maximum likelihood estimation; kernel estimation; consumer surplus measure; block rate pricing; welfare effects; compensating variation; Vartia's method;


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  1. repec:fth:stanho:e-90-11 is not listed on IDEAS
  2. 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.
  3. Burtless, Gary & Hausman, Jerry A, 1978. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiments," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 1103-30, December.
  4. Thomas MaCurdy & David Green & Harry Paarsch, 1990. "Assessing Empirical Approaches for Analyzing Taxes and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 415-490.
  5. Blomquist, Soren, 1996. "Estimation methods for male labor supply functions How to take account of nonlinear taxes," Journal of Econometrics, Elsevier, Elsevier, vol. 70(2), pages 383-405, February.
  6. Moffitt, Robert, 1990. "The Econometrics of Kinked Budget Constraints," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 4(2), pages 119-39, Spring.
  7. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, American Economic Association, vol. 71(4), pages 662-76, September.
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Cited by:
  1. Arbues, Fernando & Garcia-Valinas, Maria Angeles & Martinez-Espineira, Roberto, 2003. "Estimation of residential water demand: a state-of-the-art review," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, Elsevier, vol. 32(1), pages 81-102, March.


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