[1] In this paper, we formulate and estimate a model of residential water demand with the aim of evaluating the potential of pricing policies as a mechanism for managing residential water. The proposed econometric model offers a new perspective on urban water demand analysis by combining microlevel data with a dynamic panel data estimation procedure. The empirical application suggests that residential users are more responsive to a lagged average price specification. Another result of the estimated model is that price is a moderately effective tool in reducing residential water demand within the present range of prices, with the estimated values for income elasticity and ''elasticity of consumption with respect to family size'' reinforcing this conclusion.

The effectiveness of pricing policies depends on the price elasticity of consumption. It is well documented that residential demand for water is influenced by heterogeneity associated with differences in the size of the household and socioeconomic characteristics. In this paper, we focus on household size. Our initial hypothesis is that users' sensitivity to changes in price is different depending on the number of household members. To this end, we carry out an empirical estimation of urban water demand in Zaragoza (Spain) distinguishing between households with different sizes using data at the individual level. As far as we are aware, this approach to urban residential water demand is new in the literature. The analysis suggests that all households are sensitive to prices regardless of size. A more relevant finding is that small households are more sensitive to price changes.

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Water rates seek at once to fund the service, to distribute the cost among users and to allocate water based on demand. Therefore, rates design is frequently subject to normative criteria such as full cost recovery, efficiency, equity and simplicity. This paper, proposes a method of ensuring the operational effectiveness of the equity criterion. Specifically, the objective is to resolve the problem of equity caused by pricing systems involving stepwise increments in the cost of aggregate household consumption. The problem is that it is more costly to meet basic individual water needs, the larger the household concerned. This paper analyses the water rates applied in the city of Zaragoza (Spain) and proposes a new rates design based on the normative criteria referred to above, which is applicable to any city and, therefore, may be of general interest.