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Estimation of Residential Water Demand with Imperfect Price Perception

  • Marie-Estelle Binet

    (CREM - Centre de Recherche en Economie et Management - CNRS - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1)

  • Fabrizio Carlevaro

    (Département d'économétrie et Centre universitaire d'étude des problèmes de l'énergie - UNIGE - Université de Genève)

  • Michel Paul

    (CEMOI - Centre d'Économie et de Management de l'Océan Indien - IAE - Institut d'Administration des Entreprises - Université de la Réunion - Université de la Réunion)

Using data from a household survey carried out in the French overseas territory of Réunion, we investigate the price of drinking-water perceived by households faced with an increasing, multi-step pricing scheme. To this purpose we use an improved version of the method introduced by Shin (1985) to estimate the demand for residential water when consumers are imperfectly informed about their pricing schedule. The empirical results suggest that Réunion households underestimate the price of water and thus consume more than what is economically rational. Providing information to households about the marginal price of water may be an innovative means of inducing them to respond to pricing policies designed to promote water conservation.

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Paper provided by HAL in its series Post-Print with number halshs-00918147.

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Date of creation: Dec 2014
Date of revision:
Publication status: Published in Environmental and Resource Economics, Springer, 2014, 59 (4), pp.561-581. <10.1007/s10640-013-9750-z>
Handle: RePEc:hal:journl:halshs-00918147
DOI: 10.1007/s10640-013-9750-z
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  1. Russell Davidson & James G. MacKinnon, 1981. "Model Specification Tests Based on Artificial Linear Regressions," Working Papers 426, Queen's University, Department of Economics.
  2. Marie-Estelle Binet & Fabrizio Carlevaro & Stéphanie Durand & Michel Paul & Caroline Schlesser, 2007. "Econometric modeling and analysis of residential water demand based on unbalanced panel data," Post-Print halshs-00145013, HAL.
  3. Schleich, Joachim & Hillenbrand, Thomas, 2009. "Determinants of residential water demand in Germany," Ecological Economics, Elsevier, vol. 68(6), pages 1756-1769, April.
  4. Michael L. Nieswiadomy & David J. Molina, 1991. "A Note on Price Perception in Water Demand Models," Land Economics, University of Wisconsin Press, vol. 67(3), pages 352-359.
  5. Arbues, Fernando & Garcia-Valinas, Maria Angeles & Martinez-Espineira, Roberto, 2003. "Estimation of residential water demand: a state-of-the-art review," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 32(1), pages 81-102, March.
  6. Ruijs, A. & Zimmermann, A. & van den Berg, M., 2008. "Demand and distributional effects of water pricing policies," Ecological Economics, Elsevier, vol. 66(2-3), pages 506-516, June.
  7. Maria García-valiñas, 2005. "Efficiency and Equity in Natural Resources Pricing: A Proposal for Urban Water Distribution Service," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(2), pages 183-204, October.
  8. John A. Nordin, 1976. "A Proposed Modification of Taylor's Demand Analysis: Comment," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 719-721, Autumn.
  9. Kavezeri-Karuaihe, Selma T. & Wandschneider, Philip R. & Yoder, Jonathan K., 2005. "Perceived Water Prices and Estimated Water Demand in the Residential Sector of Windhoek, Namibia. An Analysis of the Different Water Market Segments," 2005 Annual Meeting, July 6-8, 2005, San Francisco, California 36289, Western Agricultural Economics Association.
  10. Jerry A. Hausman & David A. Wise, 1976. "The Evaluation of Results from Truncated Samples: The New Jersey Income Maintenance Experiment," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 421-445 National Bureau of Economic Research, Inc.
  11. Arjan Ruijs, 2009. "Welfare and Distribution Effects of Water Pricing Policies," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 43(2), pages 161-182, June.
  12. S. Gaudin, 2006. "Effect of price information on residential water demand," Applied Economics, Taylor & Francis Journals, vol. 38(4), pages 383-393.
  13. James J. Opaluch, 1982. "Urban Residential Demand for Water in the United States: Further Discussion," Land Economics, University of Wisconsin Press, vol. 58(2), pages 225-227.
  14. Jasper M. Dalhuisen & Raymond J. G. M. Florax & JHenri L. F. de Groot & Peter Nijkamp, 2003. "Price and Income Elasticities of Residential Water Demand: A Meta-Analysis," Land Economics, University of Wisconsin Press, vol. 79(2), pages 292-308.
  15. Shin, Jeong-Shik, 1985. "Perception of Price When Price Information Is Costly: Evidence from Residential Electricity Demand," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 591-98, November.
  16. Henry S. Foster, Jr. & Bruce R. Beattie, 1981. "On the Specification of Price in Studies of Consumer Demand under Block Price Scheduling," Land Economics, University of Wisconsin Press, vol. 57(4), pages 624-629.
  17. R. G. Taylor & John R. McKean & Robert A. Young, 2004. "Alternate Price Specifications for Estimating Residential Water Demand with Fixed Fees," Land Economics, University of Wisconsin Press, vol. 80(3), pages 463-475.
  18. Andrew C. Worthington & Mark Hoffman, 2008. "An Empirical Survey Of Residential Water Demand Modelling," Journal of Economic Surveys, Wiley Blackwell, vol. 22(5), pages 842-871, December.
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