Modelling nonlinear water demand : The case of Tunisia

The main originality of this paper is to empirically examine the presence of nonlinear behavior in residential water demand in the case of Tunisia. Within a logistic smooth transition regression (LSTR) framework, we explore the existence of nonlinearity with respect to the magnitude of water price changes. We use quarterly time series for the period 1980-2007 which describes residential water consumption and its main determinants by applying an increasing multi-step water pricing scheme. For the two consumption blocks considered, our results provide strong evidence that water consumption responds nonlinearly to the extent of price changes. Water price elasticities are found to be higher when variation in tariffs surpasses a given threshold. For instance, we found a unit elastic water demand for lower block consumers (low-income households) when price changes exceed a threshold of roughly 5%. For the upper block consumers (high-income households), water consumption is less elastic in comparison to small consumers, but still significant when the price variation exceeds a threshold of 2.6%. Our study proposes to increase the length of the lower block of consumption to achieve goals of social equity. We also recommend increasing tariff progressivity to promote water saving, at least for upper block consumers.