Every now and then, some crazy economist will come along and argue that if we really want to limit water use, we should scrap quantity controls, put up the price, and compensate low-income households.
Of course, this only works if household demand responds to the water price. If what the boffins call “the price elasticity of demand” is near-zero, then raising prices will be ineffective. So it’s useful to occasionally get some new evidence on this point. In a recent paper, Robert Stavins and coauthors estimate new price elasticities of -0.3 to -0.6. Along the way, they remind us of where the literature stands.
In a meta-analysis of 124 estimates generated between 1963 and 1993, accounting for the precision of estimates, the mean price elasticity is -0.51, the short-run median is -0.38, and the long-run median is -0.64, with 90 percent of all estimates between 0 and -0.75.
In a more recent meta-analysis of almost 300 price elasticity studies, 1963-1998, the mean price elasticity is -0.41.
In other words, if you raise the price of water by 10%, most econometric studies suggest that demand will fall by between 3% and 6%. That suggests that prices can work perfectly well to reduce water use. Time to scrap those annoying water restrictions, anyone?