Price and Consumption Misperception Profiles: The Role of Information in the Residential Water Sector

Consumer misperceptions about key economic variables, such as price or consumption, often hinder the effectiveness of natural resources management policies. When facing increasing block rates, water users might fail to identify the marginal price of their water use and guide themselves by information from their past total bill and water use amounts. However, this information might not be correctly perceived or remembered. By comparing them with actual bimonthly billing data from 1465 households in Granada (Spain), we study the inaccuracy of the users' recollections during an in-person survey that also asked them about their characteristics, environmental and conservation habits, and exposure to informational policies. A conditional mixed-process selection model is used to test the hypothesis that the degree of inaccuracy in the recollection of past water bill and consumption amounts is related to indicators of the costs and benefits of acquiring the relevant information. Then, a latent class model exploits unobserved household heterogeneity to sort households into two classes—based on whether and how accurately they recalled past bill and consumption amounts—and to estimate the probability of belonging to each class, based on observable characteristics. We derive policy recommendations and show that knowledge of consumption and bill size is rather poor but that informational policies could improve consumer knowledge and the effectiveness of pricing policies. Finally, we identify which informational policies might be most effective and what type of consumers are most likely to respond to such policies.