Applied Economics, 2006, 38,
383–393
Effect of price information on residential water demand
Abstract:
Microeconomic theory
predicts that people decrease consumption when
price increases, the magnitude of the effect depending on price elasticity.
The law of demand, however, implicitly assumes that consumers know
prices, an assumption that is not always satisfied in
markets with ex post
billing. When prices are not transparent, elasticity estimates are potentially
lower than their full information potential. Evidence of low price elasticity
abounds in residential water demand studies, limiting the effectiveness and
desirability of using price signals as a conservation tool. It is hypothesized
that resident’s sluggish response to price is partly due to the absence
of price information on water bills. Differences in the informational
content of bills are documented for the first time on the basis of sample
bills collected from 383 utilities across the
water demand model is augmented with qualitative variables describing
differences in billing information, allowing such variables to affect the
intensity with which consumers respond to price signals. No evidence
is found that non-price information items affect price elasticity but there is
a statistically significant effect in the case of price-related information;
in our sample, price elasticity increases by 30% or more when price
information is given on the bill.