Price perception under blocks tariff schemes : a comparison of drinking water consumption beliefs and behaviors and recommandations for efficient nudging policies

As tariff schedules used by public utilities to price goods like electricity, gas or drinking water are often complex, with increasing or decreasing block rates and fixed charges, an important issue discussed in the literature is the choice of the relevant price variable used by households for their consumption choice. Using data from a household survey carried out in the French overseas territory of Réunion, and on the basis of two empirical methods, we propose two indicators measuring the knowledge of the price of drinking water by households. We distinguish and compare price knowledge based on beliefs from that based on observed consumption behaviors, which are conditioned by the degree of attention of the consumer. Both methods confirm the hypothesis of price misperception, and argue in favor of price informational nudges. However, they reveal contradictory results. If a large number of households think that the price is much higher than it actually is, they base their consumption choices on an underestimated price, lower than marginal price. Nudges must therefore be deployed during periods of water consumption if a rebound effect on consumption is to be avoided. Finally, using econometric models, we identify the main determinants of price knowledge.