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Effectiveness of Conservation Pricing in Reducing Water Demand, Evidence from Increasing Block Rate Structures

Project ID: 414
Principal Investigator: Steven Piper
Research Topic: Water Marketing
Funded Fiscal Years: 2011 and 2013
Keywords: None

Research Question

Areas that are experiencing municipal and industrial water shortages can invest in water supply expansion, implement water conservation techniques, or use a combination of both to help balance water supplies and demand. Water conservation, including conservation pricing, is a demand side approach to water management that can help avoid the costs associated with water supply expansion or can be implemented in areas that do not have a financially viable supply side option. The purpose of this research is to evaluate the effectiveness of conservation pricing, specifically the use of an increasing block rate pricing structure, in reducing municipal and industrial water demand. Different types of increasing block rate structures would be expected to have varying levels of effectiveness in reducing water demand. This research will evaluate the influence of various marginal water prices on the quantity of water demanded and the most appropriate rate structure for meeting water conservation goals.

Need and Benefit

The purpose of this research is to evaluate the effect of conservation pricing structures on residential and commercial water use. More specifically, the proposed analysis would provide empirical estimates of the impact of increasing block rate structures on water use as measured by the price elasticity of demand at various block rates. The results of previous municipal and industrial water demand studies have generally shown demand to be price inelastic, meaning that a given percentage change in price leads to a smaller percentage change in quantity of water demanded. A typical range for elasticity of residential water demand is -0.20 to -0.40, where a 10% increase in price lowers quantity demanded by 2% to 4%. A typical range for elasticity of industrial water demand is -0.50 to -0.80, where a 10% increase in price lowers demand by 5% to 8%. Although it has generally been found that water demand is price inelastic, a wide range of elasticities have been found, which would lead to a wide difference in the effectiveness of increasing block rate pricing in reducing demand. In addition, there is evidence that elasticities can vary greatly depending on the block that the water user is in, season, and other nonprice factors.

Estimating elasticities at various block rates and for water suppliers that have a variety of block rate pricing structures will provide important information on the effectiveness of an increasing block rate structure in reducing water demand and meeting demand side conservation goals. Differences in elasticities at various block rates will influence potential water savings from implementation of a block rate pricing structure and can be used to help determine the type of rate structure that can achieve water conservation goals.

An example of the potential benefit from this research is in the State of California where one element to solving problems in the Sacramento-San Joaquin Delta was a plan to achieve a 20-percent reduction in per capita water use State-wide by 2020. One possible method of achieving this type of reduction would be implementation of conservation pricing structures. Knowledge of the effects of these pricing structures can help determine the optimal/least cost mix of conservation approaches that meet conservation goals.

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Research Products

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This information was last updated on April 20, 2014
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