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

Author

Listed:
  • 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.

Suggested Citation

  • Olmstead, Sheila & Hanemann, Michael & Stavins, Robert, 2005. "Do Consumers React to the Shape of Supply? Water Demand Under Heterogeneous Price Structures," Working Paper Series rwp05-039, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp05-039
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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