Residential water demand has reached a plateau and the number of customers is growing! This wasn’t supposed to happen and it is not limited to Phoenix and Tucson. It seems to be happening in California as well! Of course, this does not mean water scarcity has been avoided. Rather, it means that the nature of the residential demand for water is more complex than anyone expected.

This new research is the first product of a collaborative effort with the Phoenix and Tucson water departments to understand how effective water conservation policies can be designed. Our efforts are possible with the support of the Decision Center for a Desert City (DCDC). It is one part of the DCDC research initiative that involves  Minqiang (Kent) Zhao, a former Post-Doctoral Fellow with CEESP and Kerry Smith . The research builds on earlier work on structural and quasi-experimental strategies for estimating residential water demand, conducted with former CEESP post-doctoral fellows Aaron Strong (now on the faculty at the University of Iowa) and H. Allen Klaiber (now on the faculty at Ohio State). The current research also complements long term contributions in this area by our newest faculty, W. Michael Hanemann, Julie A. Wrigley Chair in Economics and Sustainability.

Hanemann introduced the conditional demand structure for modeling households’ responses to increasing block rate structures and demonstrated its relevance in both early contributions (Hewitt and Hanemann, Land Economics 1995) and in more recent publications in the Journal of Environmental Economics and Management. His most recent work with Santhi Nataraj also published in JEEM in 2011, exploits a natural demand shock for water pricing in Santa Cruz, California. They use the introduction of a new price block as a policy response to prolonged drought. They are able to structure a regression discontinuity design and assess the effects of a 100 percent increase in price for the highest consumption block without requiring detailed modeling assumptions. There is a clear evidence of a response.

Our new work exploits this logic using periodic changes in marginal prices for the same customers over time to recover estimates for how the heterogeneity in households’ home conditions—such as pools, landscape, number of bathrooms—influence their responses to price changes.

There are marked differences that could serve a role in future water management policy—targeting observable features of consumers in strategies to create conservative incentives.

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