Urban Water Demand Estimates Under Increasing Block Rates Page: 1
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Urban Water Demand
Estimates Under Increasing
MICHAEL L. NIESWIADOMY
DAVID J. MOLINA
ABSTRACT A residential water demand equation is estimated using the only
data set on water consumption that contains time series (monthly) observations
on individual customers facing an increasing block rate schedule. Because the
price of water both determines, and is determined by, usage, ordinary least
squares estimation will yield biased estimates. Thus, two-stage least squares and
instrumental variables techniques are used. The estimated coefficients on lawn
size, weather, house size, and income have the expected signs and are statistically
significant. However, there is not any significant response to changes in water
price, perhaps due to the relatively low cost of water.
NTEREST IN THE EFFICIENT USE of water resources has been
growing throughout the United States. Economists have begun to focus
particular attention on demand estimation. However, the opinions concern-
ing the appropriate methodology for estimating water demand have varied
significantly. Early water studies ignored the presence of block rates by
simply using an ex post calculated average price (Gottlieb 1963, Young 1973,
Foster and Beattie 1979). In his survey of studies of electricity demand,
Taylor (1975) did not find a single study that was consistent with the classical
theory of consumer behavior. Taylor suggested that the regressors should
include marginal and average price. Subsequently, Nordin (1976)
demonstrated that Taylor's specification was incorrect and should be
modified to include a marginal price and a difference variable to account
for the effects of intramarginal rates and fixed fees. Difference is defined
as the total bill minus what the bill would have been if all units had been
purchased at the marginal price.
Both Michael L. Nieswiadomy and David J. Molina are assistant pro-
fessors of economics at North Texas State University.
Copyright 2001 All Rights Reserved
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Nieswiadomy, Michael L. & Molina, David J. Urban Water Demand Estimates Under Increasing Block Rates, article, 1988; [Hoboken, New Jersey]. (digital.library.unt.edu/ark:/67531/metadc71792/m1/1/: accessed June 22, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT College of Arts and Sciences.