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Long-run water demand estimation: habits, adjustment dynamics and structural breaks

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  • Antonio Musolesi
  • Mario Nosvelli

Abstract

This article examines a water demand equation for Milan for the second half of the 20th century: 1950-2001. We focus mainly on the effects of price and habits, but also account for other factors in the demand for water such as climate, income and productive activity. Allowing for trend break stationarity or nonlinear trend stationarity, we find evidence against the unit root hypothesis for many time series. Based on this result, standard cointegration analysis would not be appropriate; therefore we adopt an alternative estimation and testing procedure. We focus, in particular, on the so-called bounds testing approach, which can be applied irrespective of the level of integration of the variables and which can be a useful modelling strategy given that dynamics are important when estimating a water demand equation. The main results are that long-run price elasticity is higher than short-run elasticity, and that consumption habits are relevant. We also find that both climate, sectoral and technological modifications affect water consumption, while income is not significant. Finally, the changes to pricing schemes in the mid-1970s provoked reactions of different magnitudes among households and firms.

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  • Antonio Musolesi & Mario Nosvelli, 2011. "Long-run water demand estimation: habits, adjustment dynamics and structural breaks," Applied Economics, Taylor & Francis Journals, vol. 43(17), pages 2111-2127.
    • Handle: RePEc:taf:applec:v:43:y:2011:i:17:p:2111-2127
    DOI: 10.1080/00036840903066642
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    1. Zhang, Jinping & Xiao, Honglin & Li, Jiayi & Shi, Xixi, 2021. "Study on the cointegration relationship between water supply and demand in the irrigation district with structural breaks," Agricultural Water Management, Elsevier, vol. 258(C).
    2. Valeria Bernardo & Xavier Fageda & Montserrat Termes, 2015. "Do droughts have long-term effects on water consumption? Evidence from the urban area of Barcelona," Applied Economics, Taylor & Francis Journals, vol. 47(48), pages 5131-5146, October.
    3. Jos頉. Castillo-Manzano & Lourdes Lopez-Valpuesta & Manuel Marchena-G & Diego J. Pedregal, 2013. "How much does water consumption drop when each household takes charge of its own consumption? The case of the city of Seville," Applied Economics, Taylor & Francis Journals, vol. 45(32), pages 4465-4473, November.
    4. Daniel A. Brent, 2016. "Estimating Water Demand Elasticity at the Intensive and Extensive Margin," Departmental Working Papers 2016-06, Department of Economics, Louisiana State University.
    5. Fullerton, Thomas M., Jr. & Ceballos, Alejandro & Walke, Adam G., 2015. "Short-Term Forecasting Analysis for Municipal Water Demand," MPRA Paper 78259, University Library of Munich, Germany, revised 04 Aug 2015.
    6. Fullerton, Thomas M., Jr. & White, Katherine & Smith, Wm. Doyle & Walke, Adam G., 2012. "An Empirical Analysis of Halifax Municipal Water Consumption," MPRA Paper 54113, University Library of Munich, Germany, revised 14 Mar 2013.

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