Working Paper Series

  • Muffled Price Signals:  Household Water Demands Under Increasing-Block Prices

    Michael W. Hanemann, Robert N. Stavins, Sheila M. Cavanagh

    Goldman School of Public Policy Working Paper (February 2002)

    In many areas of the world, including large parts of the United States, scarce
    water supplies are a serious resource and environmental concern. The possibility
    exists that water is being used at rates that exceed what would be dictated by
    efficiency criteria, particularly when externalities are taken into account. Because
    of this, much attention has been paid by policy makers and others to the use of
    demand management techniques, including requirements for the adoption of specific
    technologies and restrictions on particular uses. A natural question for economists
    to ask is whether price would be a more cost-effective instrument to facilitate water
    demand management.
    As a first step in such an investigation, this paper draws upon a newly-available
    set of detailed data to estimate econometrically the demand function for household
    use of urban water supplies. We analyze cross-sectional time-series data that track
    1,082 single-family households served by 16 water utilities in 11 urban areas in the
    United States and Canada. Because of the diverse multiple-block pricing structures
    that abound, estimating the effects of price and price structure on residential water
    demand poses some challenging and interesting problems.
    We find that the sensitivity of residential water demand to price is quite low,
    and that the effect of price structure may be more influential than the magnitude
    of marginal price itself. The household-level data we use allow us to assess the
    influences on residential water demand of climate, sociodemographic factors, and characteristics of housing stock, including home vintage. Our results indicate substantial heterogeneity in likely household responses to utility demand-management


  • The Central Arizona Project

    Michael W. Hanemann

    Goldman School of Public Policy Working Paper: 937 (November 2001)