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For an examination of the relationships between household income levels and residential water use, individual household survey data from Tucson, Arizona zte combined with monthly water use data for these same households. The objectives were to examine individual response to the existing block rate pricing sttuctuve and to provide policy conclusions on potential improvements in this rate structure. A simultaneous equation model of demand is estimated for households within each income group to determine the price elasticity of demand for each income group. The demand models show that under the existing increasing block rate pricing schedules, higher income households not only use more water, but have lower elasticities of demand. Thus a uniform proportional rate increase will cause a larger percentage drop in water use among low income households than among high income households Given the assumption of declining marginal utility of water use, this result leads to a policy recommendation for substantially steeper block rates to improve interpersonal equity in water pricing.

Static, Fisher‐Kaysen, Koyck, flow adjustment (Bergstrom), and stock adjustment econometric models of the demand for residential water are tested for their ability to explain the monthly residential demand for water in Tucson. Marginal price and a second price‐related variable are used in the estimating equations to account for block rates and fixed charges in the water rate schedule. The other independent vari ables are household income and evapotranspiration minus rainfall. The Fisher‐Kaysen model produced very poor statistical results. The estimated long‐run marginal price elasticities of demand varied from −0.266 to −0.705. The short‐run marginal price elasticity estimates varied from −0.179 to −0.358 except for the linear flow adjustment model with a value of −2.226. This unexpected result casts some doubt on the applicability of the flow adjustment model to estimating the price elasticity of demand with monthly data.

This paper examines the problem of simultaneous‐equations bias in estimation of the water demand function under an increasing block rate structure. The Hausman specification test is used to detect the presence of simultaneous‐equations bias arising from correlation of the price measures with the regression error term in the results of a previously published study of water demand in Tucson, Arizona. An alternative simultaneous equation model is proposed for estimating the elasticity of demand in the presence of block rate pricing structures and availability of service charges. This model is used to reestimate the price and rate premium elasticities of demand in Tucson, Arizona for both the usual long‐run static model and for a simple short‐run demand model. The results from these simultaneous equation models are consistent with a priori expectations and are unbiased.