The supply of water is a major public policy concern in the United States and

even Canada. The Figure shows U.S. drought conditions in 2003.

Environmental authorities in both countries have promoted pricing as a means to

stimulate conservation of water.

Source: Environmental Protection Agency

Water is used by households as well as businesses. The price elasticity

of the demand for water has been estimated to range from -0.20 to -0.40 among

households, and from -0.50 to -0.80 among business users.1

However, not all water users are subject to metering. Even among

households subject to metering, the price structure might conflict with

conservation. The U.S. Environmental Protection Agency's Community Water

System Survey for the year 2000 reported that 23% of water utilities levy a "flat

fee" under which the user pays a fixed charge regardless of usage.

Environment Canada reported that, in the year 1999, 43% of residential

users were charged a flat fee, while another 12% were subject to a declining rate

structure within which the unit price decreased with usage. Average

consumption was 70% higher among users subject to flat fees as compared with

those subject to volume-based rates.

2007, Ivan Png. This case is based, in part, on Holly Stallworth, "Water and Wastewater

Pricing", Office of Wastewater Management, U.S. Environmental Protection Agency

EPA 832-F-03-027, and

1 Beecher, J.A. et. al. Revenue Effects of Water Conservation and Conservation Pricing: Issues

and Practices. National Regulatory Research Institute, Columbus, Ohio (1994).

Discussion Questions

(a) How do you expect the price-elasticity of the residential demand for water

to vary with the total annual consumption of the household?

(b) Who benefit relatively more from a flat fee? Poor or rich households?

(c) Considering that a large proportion of residential users face a flat charge

or even decreasing unit prices, do you think that the price-elasticity of

residential demand is under or over-estimated?

(d) What are the implications of your answer in (c) for raising prices as a

conservation polic