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The Value of Scarce Water: Measuring the Inefficiency of Municipal Regulations

  • Erin T. Mansur
  • Sheila M. Olmstead

Rather than allowing water prices to reflect scarcity rents during periods of drought-induced excess demand, policy makers have mandated command-and-control approaches, like the curtailment of certain uses, primarily outdoor watering. Using unique panel data on residential end-uses of water, we examine the welfare implications of typical drought policies. Using price variation across and within markets, we identify end-use specific price elasticities. Our results suggest that current policies target water uses that households, themselves, are most willing to forgo. Nevertheless, we find that use restrictions have costly welfare implications, primarily due to household heterogeneity in willingness-to-pay for scarce water.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13513.

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Date of creation: Oct 2007
Date of revision:
Publication status: published as Mansur, Erin T. & Olmstead, Sheila M., 2012. "The value of scarce water: Measuring the inefficiency of municipal regulations," Journal of Urban Economics, Elsevier, vol. 71(3), pages 332-346.
Handle: RePEc:nbr:nberwo:13513
Note: EEE IO
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