Demand Management Through Responsive Pricing

Hanke, Steve H.; Davis, Robert K.

doi:10.1002/j.1551-8833.1971.tb02567.x

Cited by 25 publications

(9 citation statements)

References 6 publications

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“…Average consumption per dwelling finit was used as the dependent variable in a regression equation with the applicable block rate as the price. Hanke and Davis [1971] and North [1967] both analyzed aggregate data while evaluating the price at the appropriate block rate, although their analyses differed somewhat from Howe and Linaweaver's. Some studies in estimating demand for a cross section of users deleted price as a variable due to lack of variation [see Wong, 1972].…”

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confidence: 99%

Price variable in residential water demand models

Gibbs¹

1978

Water Resources Research

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There have been inconsistencies in past residential water demand studies concerning the specification of the relevant price variable. Both average and marginal price have been used. Households faced with the decision to expand (or contract) their water consumption are responsive to the additional cost (or savings) involved with this decision. The appropriate measure of this price is marginal price, not average price. Data were gathered from a large metropolitan area, Miami, Florida, to illustrate the divergence in estimation from two demand models, identically specified, except for the price variable. One utilized marginal price, the other average price. Predictions of consumption varied from 22 to 107% between the two models. The average price model significantly overestimated the response of consumption to price and income changes, a result worthy of consideration. This paper focuses on the price variable used in residential water demand models. Observations from a large metropolitan area, Miami, Florida, are used to form an empirical comparison of two formulations of price, marginal and average, in estimating residential water demand. PRICE VARIABLE IN PAST WATER DEMAND STUDIESThree different types of rate structures have been utilized by water utilities over the years, namely, the flat, uniform, and block rates. Flat rate pricing is generally used in conjunction with one of the other rate structures as a minimum charge for the first few thousand gallons.The demand for a commodity is generally postulated as the quantity demanded expressed as a function of its unit price and several other variables that, unique to each study, help explain the variation in the quantity taken. The price is the amount that the consumer must pay for each and every unit purchased. In most cases, the unit price will not vary with the amount purchased. That is, markets generally do not discriminate by quantity purchased; any quantity discounts apply equally to all units.In the case of a uniform rate, the same principle applies: one rate exists, and all units of water purchased are charged the same price. The block rate pricing scheme, however, differs from the traditional. A lower (higher) price is not available until the first units are purchased at the higher (lower) rate.Two methods have been used to calculate the unit 'price' of water for a firm utilizing block rate pricing (see Chiogioji and Chiogioji [1973] for a thorough review of various water demand studies). The first method involves calculating the average price-per unit by dividing the total number of gallons purchased into the total water bill. Young [1973] defined the price variable in this manner in estimating the demand for municipal water in Tucson, Arizona. D. R. Fitzsimmons and J. R. Garrett (unpublished manuscript, 1974) also used the same measure of price in their survey of water customers in Las Vegas, Nevada. They utilized individual household observations in estimating the responsiveness of hypothetical price increases.The second formulation of the price of wa...

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confidence: 99%

Price variable in residential water demand models

Gibbs¹

1978

Water Resources Research

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“…This approach is based upon the premise that water is necessary for life. Hence, price demand relationships are ignored, and forecasts of water demands are, in effect, water "requirements" (Hanke and Davis, 1971, p. 555).…”

Section: The Demand Functionmentioning

confidence: 99%

“…Water demand is notoriously seasonal in nature (Flack, 1980) and has led water planners to concentrate on providing peak load requirements. Additional water developments are of greater value if they can provide for peak load demands than if they are directed at satisfying average demands (Hanke and Davis, 1971).…”

Section: Seasonal Water Supply and Demandmentioning

confidence: 99%

The Enhanced Role of Water Conservation in the Cost‐benefit Analysis of Water Projects1

Griffin

Stoll

1983

J American Water Resour Assoc

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The concept of water Conservation has increased in importance because of revisions in the rules and procedures for performing cost-benefit analyses of federal water projects. These revisions include a requirement that nonstructural and water conservation measures be incorporated into economic assessments of projects. Project analyses will now proceed as if water supplies were allocated "most effectively," that is, to their highest valued uses. A related requirement provides that the net benefits of any project should now be valued using willingness to pay measures. A specific cost-benefit methodology accommodating the revisions is constructed and discussed. Informational requirements for applying this methodology are identified. In addition to being consistent with federal mandates, this technique offers important advantages over the traditional "requirements" approach to water supply planning. (KEY TERMS: water conservation; water pricing; benefitcost analysis; willingness to pay; economics.)

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“…See for example, Hanke and Davis () and Hanke and Davis (), Feldman (), Mann and Schlenger (), Zarnikau (), Reynaud () and Kneese ().…”

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Groundwater management: Waiting for a drought*

Amundsen

Jensen

2019

Natural Resource Modeling

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In this article we present a stylized model for optimal management of an unconfined groundwater resource when the threat of drought exists. The drought is modeled as a stochastic event that hits at an uncertain date and two benchmark management policies are investigated: (a) A policy of optimal dynamic management ignoring the threat of drought; and (b) an economically optimal policy that accounts for the threat of a drought. We show that the optimal predrought steady‐state equilibrium stock size of groundwater under policy b is larger than that under policy (a) Furthermore, we show that an increase in the probability of a drought gives rise to two counteracting effects: One in the direction of a larger predrought steady‐state equilibrium stock size (a recovery effect) and one in the direction of a lower predrought steady‐state equilibrium stock (an extinction effect). We find that the recovery effect dominates the extinction effect. Recommendations for Resource Managers: We analyze two groundwater extraction policies that can be used when a threat of drought exists: (a) Dynamic optimal management ignoring the threat of drought; and (b) dynamic optimal management taking the threat of drought into account. We show that the predrought steady‐state equilibrium stock size of water should be larger under the policy (b) than under policy (a). This conclusion has three implications for resource managers: Current groundwater management should take future extraction possibilities into account. A resource manager ought to take the threat of drought into account in groundwater management. A buffer stock of water should be built‐up before the drought to be drawn upon during the event.

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Demand Management Through Responsive Pricing

Cited by 25 publications

References 6 publications

Price variable in residential water demand models

Price variable in residential water demand models

The Enhanced Role of Water Conservation in the Cost‐benefit Analysis of Water Projects1

Groundwater management: Waiting for a drought*

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