Household Demand and Welfare Implications of Water Pricing in Cyprus

Pashardes, Panos and Koundouri, Phoebe and Hajispyrou, Soteroula (2002): Household Demand and Welfare Implications of Water Pricing in Cyprus. Published in: Environment and Development Economics , Vol. 7, No. 4 (2002): pp. 659-685.

Abstract

This paper considers a model of household demand for water in a theoretical framework consistent with funtamendal principles of comsumer behaviour. It applies this model to individual household data to estimate the price and income elasticities of residential demand for water in Cyprus and evaluate the welfare effects associated with changes in the water pricing system. We &nd that the current regionally heterogeneous increasing block pricing system in the island introduces gross price distortions that are not justi&ed either on efficiency or equity grounds. A shift towards uniform marginal cost pricing will eliminate the deadweight loss of the current system. However, its bene&ts will be distributed in favour of the better off households. Overall, price can be an effective tool for residential water demand management, however, it may also lead to socially undesirable distributional effects on households.

• Item Type: MPRA Paper
• Language: English
• Keywords: Residential water demand, increasing block pricing, consumer welfare, water management
• Subjects: D - Microeconomics > D6 - Welfare Economics; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q2 - Renewable Resources and Conservation > Q25 - Water; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q2 - Renewable Resources and Conservation

References

Banks J., Blundell R. and Lewbel A., 1997, Quadratic Engel Curves and Consumer Demand, Review of Economics and Statistics, 4,527-539.

Blundell, R., Pashardes, P., and Weber, G., 1993, What do we Learn about Consumer Demand Patterns from Micro-data, American Economic Review, 83, 570-597.

Billings, B., 1982. Speci&cation of block rate price variables in demand models. Land Economics, 58(3), 386-393.

Chicoine, D. and Ramamurthy, G., 1986. Evidence on the speci&cation of price in the study of domestic water demand. Land Economics, 62(1), 26-32.

Dinar, A., 2000, The political economy of water pricing reforms, in Dinar A (ed) The political economy of water pricing reforms, Oxford University Press.

Dandy, G., Nguyen, T. and Davies, C., 1997. Estimating residential water demand in the presence of free allowances. Land Economics, 73(1), 125-139.

Foster, H. S. Jr., and Beattie B., 1979. Urban residential demand for water in the United States. Land Economics, 55 (Feb.), 43-58.

Foster and Beattie, 1981a. Urban residential demand for water in the United States:Reply. Land Economics, 57 (May), 257-265.

Foster and Beattie, 1981b. On the speci&cation of price in studies of consumer demand under block price scheduling. Land Economics, 57 (Nov.), 624-29.

Gibbons, D. C., 1986. The economic value of water. Washington, DC, Resources for the Future.

Gorman, T., 1981, Some Engel curves, in Essays in the Theory and Measurement of Consumer Behaviour in Honor of Richard Stone, ed. A. Deaton, Cambridge University Press.

Gottlieb, M., 1963. Urban domestic demand for water: A Kansas case study. Land Economics, 39 (May): 204-210.

Hanke, S., and de Maré, L., 1982. Residential water demand: a pooled time series cross-section study of Malmö, Sweden. Water Resources Bulletin, 18(4), 621-625.

Hansen, L., 1996. Water and energy price impacts on residential water demand. Copenaghen.Land Economics, 72(1), 66-79.

Herrington, P. R., 1987. Pricing of water services. OECD Publication.

Höglund, L., 1999. Household demand for water in Sweden with implications of a potential tax on water use. Water Resources Research, 35(12), 3853-3863.

Lewbel, A., 1990, Full Rank Demand Systems, International Economic Review, 31,289-300.

Lewbel, A., 1991, The Rank of Demand Systems: Theory and Nonparametric Estimation,Econometrica, 59, 711-730.

Martinez-Espieneira, 2000. Residential water demand in the Northwest of Spain. Paper presented in the 10th annual conference of the European Association of Environmental and Resource Economists (EAERE 2000).

Nauges, C., and Thomas, A., 2000. Privately-operated water utilities, municipal price negotiation, and estimation of residential water demand: The case of France. Forthcoming in Land Economics, 76(1).

Nieswiadomy, M., and Cobb, S., 1993. Impact of pricing structure selectivity on urban water demand. Contemporary Policy Issues, 11(6), 101-113.

Nieswiadomy, M. L., and Molina, D. G., 1989. comparing residential water estimates under decreasing and increasing block rates using household data.

Nordin, J., 1976. A proposed modi&cation on Taylors demand supply analysis: comment.Bell Journal of Economic Management and Science, 7(2), 719-721.

OECD, 1987. Pricing of water services, organization of economic co-operation and development, Paris.

Renwick, M., and Archibald, S., 1998. Demand side management policies for residential water use: Who bears the conservation burden? Land Economics, 74(3), 343-359.

Schefter, J., and David, E., 1985. Estimating residential water demand under multitariffs using aggregate data. Land Economics, 61(3), 272-80.

Taylor, L. D., 1975. The demand elasticity a survey. The Bell Journal of Economics, 6 (Spring), 74-110.

Young, R. A., 1973. Price elasticity of demand for municipal water: Case study of Tucson, Arizona. Water Resources Research, 9 (Dec.), 1068-1072.24