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Do Consumers React to the Shape of Supply? Water Demand Under Heterogeneous Price Structures

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  • Olmstead, Sheila

    (Yale U)

  • Hanemann, Michael

    (U of California, Berkeley)

  • Stavins, Robert

    (Harvard U and Resources for the Future)

Abstract

We perform an empirical analysis of the influence of price and price structure on residential water demand, using the most price-diverse, detailed, household-level water demand data yet available for this purpose. Ours is the first analysis to address both the simultaneous determination of marginal price and water demand under block pricing, and the possibility of endogenous price structures in the cross section. We find that households facing increasing block prices may be more sensitive to price increases than households facing uniform marginal prices. Tests for endogenous price structures cannot rule out a behavioral response to the shape of supply, but suggest that observed differences in price elasticity under supply curves of varying shapes may result, in part, from underlying heterogeneity among utility service areas.

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Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp05-039.

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Date of creation: Jun 2005
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Handle: RePEc:ecl:harjfk:rwp05-039

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