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Do Consumers React to the Shape of Supply? Water Demand under Heterogeneous Price Structures


  • Stavins, Robert
  • Hanemann, W. Michael
  • Olmstead, Sheila


Urban water pricing provides an opportunity to examine whether consumers react to the shape of supply functions. We carry out an empirical analysis of the influence of price and price structure on residential water demand, using the most price-diverse, detailed, household-level water demand data yet available for this purpose. We adapt the Hausman model of labor supply under progressive income taxation to estimate water demand under non-linear prices. Ours is the first analysis to address both the simultaneous determination of marginal price and water demand under block pricing and the possibility of endogenous price structures in the cross section. In order to examine the possibility that consumers facing block prices are more price-responsive, all else equal, we test for price elasticity differences across price structures. We find that households facing block prices are more sensitive to price increases than households facing uniform marginal prices. Tests for endogenous price structures cannot rule out a behavioral response to the shape of supply, but suggest that observed differences in price elasticity under supply curves of varying shapes may result, in part, from underlying heterogeneity among utility service areas.

Suggested Citation

  • Stavins, Robert & Hanemann, W. Michael & Olmstead, Sheila, 2005. "Do Consumers React to the Shape of Supply? Water Demand under Heterogeneous Price Structures," Discussion Papers dp-05-29, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-05-29

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    References listed on IDEAS

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    More about this item


    Non-linear pricing; water demand; price elasticity;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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