Estimating Residential Water Demand Under Systematic Shifts Between Uniform Price (UP) and Increasing Block Tariffs (IBT)

We evaluate whether changing from a uniform price (UP) to an increasing block tariff (IBT) changes people's behavior. We exploit a unique setting in which the price scheme moves back and forth yearly from UP to IBT. We discuss the effectiveness of IBT in reducing summer consumption. This issue...

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Bibliographic Details
Published in:Water resources research 2024-04, Vol.60 (4), p.n/a
Main Authors: Chovar Vera, A. M., Vásquez‐Lavín, F. A., Ponce Oliva, R.
Format: Article
Language:English
Subjects:
Consumption
Elasticity
high and low consumption
increasing‐block tariff structure
Price elasticity
structural estimation
Summer
Tariffs
uniform prices
Water consumption
Water demand
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Summary:We evaluate whether changing from a uniform price (UP) to an increasing block tariff (IBT) changes people's behavior. We exploit a unique setting in which the price scheme moves back and forth yearly from UP to IBT. We discuss the effectiveness of IBT in reducing summer consumption. This issue is relevant to many countries and policymakers interested in designing tariff structures. There is no evidence of how the same consumer may react to systematically switching from one tariff structure to another yearly. We estimate the residential water demand and its price elasticity using a generalized least squared random effect model for the UP and the discrete/continuous choice model for the IBT. In addition, we split the sample between low and high‐consumption groups. For the low consumption group unaffected by the tariff change, the elasticity in the nonsummer months is higher (more elastic) than in the summer. Consumers in this group reduce their elasticity from nonsummer to summer months (−0.299 vs. −0.071, respectively) and increase their consumption by 13%. The high consumption group increased its summer consumption, but only by 8.7%, and contrary to the first group, its elasticity increased significantly (from −0.299 to −0.568). The high‐consumption group is indeed affected by the change in tariff. From a policy perspective, this implies that the IBT structure is relevant. However, if the policy seeks to promote conservation, it needs to be adjusted to a lower decile of the water consumption distribution to affect a more significant portion of the population. Key Points We estimate the residential water demand and its price elasticity under systematic shifts between uniform price and increasing‐block tariff structure We estimate different treatments of the sample: splitting it between summer and nonsummer months and between low and high consumption levels From a policy perspective, we find that people react to tariff changes and that tariff reforms should consider consumers' heterogeneity
ISSN:0043-1397
1944-7973
DOI:10.1029/2022WR033508