Urban Water Conservation: Comparing Price and Non-price Policies

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Urban Water Conservation Comparing Price and
Non-price Policies

• Sheila M. Olmstead
• Yale University
• Federal Reserve Bank of Atlanta
• June 17, 2009

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Drought-Stricken South Facing Tough Choices
October 16, 2007
State eases water rules, but urges
restraint Atlanta Journal-Constitution June 10,
2009
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Water Demand and Prices

• On average, a 10 increase in the price of water
  reduces residential demand by 3 to 4 in U.S.
  cities.
• This is similar to the price sensitivity of
  residential electricity demand.
• The response of water demand to price increases
  is stronger
• under higher prices and
• in the long run.

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Typical non-price conservation policies
Water Rationing
Technology Standards
Outdoor watering may be restricted to a certain
number of days per week, or banned altogether.
Federal law requires low-flow plumbing fixtures
in new construction. Cities and states may also
require retrofitting.
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Water Demand and Non-price Conservation Policies

• Non-price conservation policies can reduce water
  demand, though effectiveness varies.
• Mandatory policies (well-enforced) have stronger
  effects than voluntary policies and education.
• Water savings from promoting water-conserving
  fixtures may be smaller than expected, due to
  behavioral responses.

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Comparing Price and Non-price Conservation
Policies

• Cost effectiveness
• Monitoring and enforcement
• Equity considerations
• Political feasibility

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Prices achieve conservation cost-effectively

• Households and firms decide how to reduce
  consumption, and by how much.
• Households and firms with different costs and
  benefits of water use can react differently.
• Water use reductions occur among users with the
  lowest value for water use.

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Monitoring and Enforcement

• Non-price policies require significant monitoring
  and enforcement.

How to report water cheaters Atlanta
Journal-ConstitutionOctober 19, 2007

• Cheating on a water price increase requires
  that users consume water off-meter more
  difficult.

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Equity Considerations

• Low-income households tend to contribute a
  greater share of aggregate water demand
  reductions when prices increase, in comparison to
  non-price policies.
• This does NOT mean that price-based approaches
  are regressive.
• Progressive price-based approaches can be
  designed.
• The equitability of non-price policies depends on
  how they are financed.

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Political Feasibility

• Raising water prices is politically difficult.
• Ironically, non-price policies may be more costly
  (though costs are less transparent).
• Economic costs of prescriptive approach
• Utility budget deficits often require price
  increases after successful non-price
  conservation policies.