The Value of Free Water: Analyzing South Africa's Free Basic Water Policy

Abstract

This paper analyzes South Africa's Free Basic Water Policy, under which households receive a free water allowance equal to the World Health Organization's recommended minimum. I estimate residential water demand, evaluate the welfare effects of free water, and provide optimal price schedules derived from a social planner's problem. I use a data set of monthly metered billing data for 60,000 households for 2002–2009 from a particularly disadvantaged suburb of Pretoria, with rich price variation across 20 different nonlinear tariff schedules. I find that the free allowance acts as a lump‐sum subsidy, without large effects on water consumption. However, it is possible to reallocate the current subsidy to form an optimal tariff without a free allowance, which would increase welfare while leaving the water provider's profit unchanged. This optimal tariff would also reduce the number of households consuming low quantities of water, a desirable policy goal according to the WHO.

Conservation policies: Who responds to price and who responds to prescription?

“…In Table 5, we present coefficients from alternative specifications of our price variable. In column (1), we report key parameter estimates for equation 1using marginal price, as neoclassical theory and recent empirical research by Szabo (2015) and Nataraj and Hanemann (2011) would suggest. 16 Surprisingly, there is a positive and significant price coefficient for the IV fixed effects model (Panel A) and a positive but insignificant coefficient for the IV random effects model (Panel B).…”

The Moving Line Between State Benevolence and Control: Municipal Indigent Programmes in South Africa

“…In general, households exhibited very little familiarity with the meaning of the numbers on the meter and the units in which their water consumption was being measured. (Szabó, 2015) Municipal governance problems in South Africa derive in part from the larger political economy, which produced local government as a third sphere of government, but largely self-financed through selling services and collecting property rates (Atkinson, 2002;McDonald and Ruiters 2005). Unlike provinces, municipalities are obliged to raise their own revenue and recover costs and they are permitted to privatise services.…”

Infrastructure Quality and the Subsidy Trap

“…However, estimating 30 Moffitt (1986) provides the standard exposition of the approach; equation (16) in that paper corresponds to equation A.1 in online Appendix A. The methodology has been used for estimation of household demand for water with nonlinear price schedules (e.g., Hewitt 1993;Pint 1999;Olmstead, Hanemann, and Stavins 2007;Szabo 2013). It is also used for the estimation of labor supply in the presence of nonlinear tax schedules (e.g., MaCurdy, Green, and Paarsch 1990).…”