The elasticity of commercial water demand in Nairobi, Kenya

We investigate the price responsiveness of commercial and industrial water users in Nairobi, Kenya using billing data from 32,793 commercial and industrial customers over five years that includes 663,000 billing records with usable, metered water use data. We examine water demand before and after a relatively substantial tariff increase in 2015 that collapsed the increasing block tariff from four blocks to three and created a new zero-cost ”lifeline” block of seven cubic meters. Rather than estimate an instrumental variables approach, we use a simple price specification that we believe fits the available evidence on price perception from the household demand literature: lagged average total price. Pooling all data, we find inelastic demand: a 10% increase in average total price is associated with a 1.1% reduction in monthly water use. Firms that have a lower mean monthly water use are more price responsive than firms with moderate water use. We find no price effect among the largest water users. Finally, we estimate separate demand models for various types of businesses, finding inelastic demand in six of seven categories (construction, garages, industrial users, markets/retail, and small office buildings). Large office buildings are not price responsive, and we find wrong-signed price elasticities for restaurants.