The value of scarce water: Measuring the inefficiency of municipal regulations

Abstract

Keywords: Drought policy Increasing-block price Market-based regulation Urban water demand Water price Water restriction a b s t r a c t Rather than allowing urban water prices to reflect scarcity rents during periods of drought-induced excess demand, policy makers have mandated command-and-control approaches, primarily rationing the use of water outdoors. While such policies are ubiquitous and likely inefficient, economists have not had access to sufficient data to estimate their economic impact. Using unique panel data on residential end-uses of water in 11 North American cities, we examine the welfare implications of urban water rationing in response to drought. Using estimates of expected marginal prices that vary both across and within markets, we estimate price elasticities specific to indoor and outdoor water use. Our results suggest that current policies do target water uses that households, themselves, are most willing to forgo. Nevertheless, we find that rationing outdoor water in cities has costly welfare implications, primarily due to household heterogeneity in willingness-to-pay for scarce water. We find that replacing rationing policies with a market-clearing ''drought price'' would result in welfare gains of more than 29% of what households in the sample spend each year on water.

Understanding Fundamental Phenomena Affecting the Water Conservation Technology Adoption of Residential Consumers Using Agent-Based Modeling

“…Firstly, the age of a household dictates openness to new technology [36]. The newer the home, the more likely it is to already have water-saving infrastructure [36].…”

“…Firstly, the age of a household dictates openness to new technology [36]. The newer the home, the more likely it is to already have water-saving infrastructure [36]. The household size also influences public perception, for those who live in bigger homes may also incur larger water costs and, thus, feel more obliged to invest in water-and cost-saving technology [32].…”

The importance of municipal and agricultural demands in future water shortages in the United States

“…restricting outdoor water use) to curb demand in the short run and technology standards (e.g. requiring low flow toilets) to curb demand in the long run (Mansur and Olmstead 2012). In 2018, for example, over 1000 public water suppliers in Texas instituted water use restrictions in response to ongoing drought 4 .…”

U.S. Urban Water Prices: Cheaper When Drier

“…A basic economic principle for achieving efficiency is to set price equal to marginal cost. In the context of water supply, marginal cost includes not only the variable cost associated with providing an additional unit of water to the consumer (short-run marginal cost) but may also include the cost of expanding water supply (long-run marginal cost) and scarcity rents (Hall, 2009a;Mansur & Olmstead, 2012;Riordan, 1971). The variability of future flows will affect all components of marginal cost (short run, long run, and scarcity rents) (Riordan, 1971).…”

“…Economists typically advocate using prices to balance supply and demand of a scarce resource (e.g., Chesnutt & Beecher, 1998;Dalhuisen et al, 2003;Grafton et al, 2011Grafton et al, , 2015Griffin, 2001;Hirshleifer et al, 1960;Howe & Linaweaver, 1967;Olmstead & Stavins, 2009;Renwick & Green, 2000). Mansur and Olmstead (2012) showed that using water pricing has significant potential welfare gains compared to regulation. However, since demand for water is inelastic (Arbués et al, 2003;Dalhuisen et al, 2003, among others), high prices may be necessary to balance supply and demand when water is scarce.…”