Transparent Prices for Municipal Water: Impact of Pricing and Billing Practices on Residential Water Use

November 29, 2004 - 12:00pm
Bldg. 90
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Economic Research shows overwhelmingly that residential consumers do not pay much attention to price changes when they make decisions about water use. This weak price sensitivity is often attributed to the intrinsic nature of water as a necessity. However, a large part of water use is the result of choices that could easily be altered without affecting basic welfare. Economic theory points to at least two other reasons why consumers would not be responsive to price changes for water use: the fact that water bills constitute a small portion of their budgets, and the fact that price information is costly. Then, price sensitivity may be increased in two ways: by significantly increasing the total amount to be paid on the utility bill and by laying out water bills so that price and usage information is transparent. The paper explores the empirical evidence using aggregate data from the AWWA supplemented with primary data on water bills. Results indicate that residential water use decreases when more utilities are included on the bill, confirming the first hypothesis. They also indicate that price transparency reduces water use and increases sensitivity to price changes. The effect is not large but enough to warrant some attention to billing practices in a comprehensive conservation strategy.

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