Limits of pricing policy in curtailing household water consumption under scarcity conditions

Abstract

A key policy question in designing urban water policy and institutional reforms is: what should be the appropriate structure of water charges to ensure long-term sustainability of water service? This is because water pricing touches on equity and on the willingness of the consumer to pay, but more on its affordability. This study focuses on understanding the nature of household demand for water, and attempts to express the household demand functions. A panel of data of 10,564 complete observations on water bills, drawn from a household expenditure survey conducted in 2003, is used to estimate domestic water demand function. Price and other dummy variables were used in the analysis and the results discussed. Specifically, the household water demand and the per capita demand are analysed, taking into consideration such variables as marginal price, rate structure premium and level of household income. The results show that the estimated water demand is inelastic and so is the income elasticity. The effect of the findings on water policy making in regard to pricing is cited. Limitations of price effectiveness as a tool to curtail water consumption are highlighted.