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Water Demand Under Alternative Price Structures

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  • Sheila Olmstead
  • W. Michael Hanemann
  • Robert N. Stavins

Abstract

We estimate the price elasticity of water demand with household-level data, structurally modeling the piecewise-linear budget constraints imposed by increasing-block pricing. We develop a mathematical expression for the unconditional price elasticity of demand under increasing-block prices and compare conditional and unconditional elasticities analytically and empirically. We test the hypothesis that price elasticity may depend on price structure, beyond technical differences in elasticity concepts. Due to the possibility of endogenous utility price structure choice, observed differences in elasticity across price structures may be due either to a behavioral response to price structure, or to underlying heterogeneity among water utility service areas.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13573.

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Date of creation: Nov 2007
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Publication status: published as Olmstead, Sheila M. & Michael Hanemann, W. & Stavins, Robert N., 2007. "Water demand under alternative price structures," Journal of Environmental Economics and Management, Elsevier, vol. 54(2), pages 181-198, September.
Handle: RePEc:nbr:nberwo:13573

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  1. Moffitt, Robert, 1990. "The Econometrics of Kinked Budget Constraints," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 119-39, Spring.
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  7. Christopher Timmins, 2003. "Demand-Side Technology Standards Under Inefficient Pricing Regimes," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 26(1), pages 107-124, September.
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  11. MICHAEL Nieswiadomy & STEVEN L. Cobb, 1993. "Impact Of Pricing Structure Selectivity On Urban Water Demand," Contemporary Economic Policy, Western Economic Association International, vol. 11(3), pages 101-113, 07.
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  13. James E. T. Moncur & Richard L. Pollock, 1988. "Scarcity Rents for Water: A Valuation and Pricing Model," Land Economics, University of Wisconsin Press, vol. 64(1), pages 62-72.
  14. Moffitt, Robert, 1986. "The Econometrics of Piecewise-Linear Budget Constraints: A Survey and Exposition of the Maximum Likelihood Method," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(3), pages 317-28, July.
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