Effect of price information on residential water demand

Abstract

Microeconomic theory predicts that people decrease consumption when price increases, the magnitude of the effect depending on price elasticity. The law of demand, however, implicitly assumes that consumers know prices, an assumption that is not always satisfied in markets with ex post billing. When prices are not transparent, elasticity estimates are potentially lower than their full information potential. Evidence of low price elasticity abounds in residential water demand studies, limiting the effectiveness and desirability of using price signals as a conservation tool. It is hypothesized that resident's sluggish response to price is partly due to the absence of price information on water bills. Differences in the informational content of bills are documented for the first time on the basis of sample bills collected from 383 utilities across the USA. A standard aggregate water demand model is augmented with qualitative variables describing differences in billing information, allowing such variables to affect the intensity with which consumers respond to price signals. No evidence is found that non-price information items affect price elasticity but there is a statistically significant effect in the case of price-related information; in our sample, price elasticity increases by 30% or more when price information is given on the bill.

Switching on Electricity Demand Response: Evidence for German Households

“…In sum, sample selection issues notwithstanding, in line with the literature (see e. g. Gaudin (2006) and Carter and Milon (2005)), we find evidence that households with a crude idea about current price levels (Group 1) are more price-elastic than uninformed households (Group 0). In fact, for price-ignorant households, the price elasticity estimate does not differ from zero at any conventional significance level (Table 4).…”

“…Gaudin (2006), for instance, analyzes the effect of de-tailed price information presented on water bills, finding that households that are aware of price levels are considerably more sensitive to price changes than price-ignorant households. In a similar vein, examining the effect of price knowledge for various utility services, Carter and Milon (2005) also reach the conclusion that informed households are more responsive to prices than those without any clue about prices.…”

Determinants of residential water demand in Germany

“…Since sufficient data at the level of individual households are typically not available, it is quite common to use aggregate data (see Höglund 1999 and the overview provided therein, or Dalhuisen et al 2003, or Gaudin 2006. The drawback to this approach, however, is that variations across households are eliminated.…”

Reports of Water Quality Violations Induce Consumers to Buy Bottled Water

“…Apart from a subject of drinking water quality, consumer response to information that has been addressed in different topics such as eco-labeling (Teisl et al [2002]), food safety concerns (Piggott and Marsh [2004]), price information on water bills (Gaudin [2006]), and different formats of water quality reports (Johnson [2003]). Generally, they find, like we do, that the public responds to information about environmental concerns.…”