Water Demand Modeling
Emanuele Massetti
FEEM and CMCC
Prepared for the Capacity Building Programme on the Economics of Adaptation
2nd Regional Training Workshop Agenda
Bangkok, 30 September – 4 October 2013
Source: http://www.unep.org/dewa/vitalwater/article42.html
Source: http://www.unep.org/dewa/vitalwater/article43.html
Water uses
• World Bank Data
Water and Climate Change
Water infrastructures
artandfoodofitaly.blogspot.com
dx.cooperhewitt.org
Water infrastructures
www.thisoldhouse.com -
Why pricing water?
• More efficient allocation across alternative uses
– Prices direct water where it is more valuable
– Prices more efficient than other approaches
• Reduces water losses:
– Demand: more efficient water uses
– Supply: more efficient distribution of water
• Allows raising revenues for investments
The following slides use material from Sheila M. Olmstead and Robert N. Stavins (2007), “Managing Water Demand
Price vs. Non-Price Conservation Programs.” A Pioneer Institute Working Paper, No. 39, July 2007. This is an excellent
and accessible introduction to water pricing.
Pricing of water (Theory)
• Buyers:
– Willing to pay more for more units as scarcity
increases
– Downward sloping demand curve
• Sellers
– Efficiency requires that water be sold at the long-run
marginal cost
– Willing to supply more as price increases
– Upward sloping supply curve
• Equilibrium
– Marginal benefit equal to marginal cost
Equilibrium in the market for water
(Theory)
$/unit
supply
demand
units
Inefficient water pricing (Reality)
• Water is not typically traded in efficient
markets
• Water not sold at the long-run marginal cost
• Water is priced too low
– Excessive use of residential water
– Relocation of industries and agriculture where
water is not abundant
– Inefficient use of water in industry and agriculture
Pricing methods
• Flat water fees (unmetered)
– No incentive to save water
– Easy to administer
• Volumetric rates (metered)
– Increasing block prices
– Decreasing block prices
Block tariffs
• IBP:
– Affordability, right to
water
– If too cheap, low
investment
• DBP:
– Subsidy to high consumers
– Possibly unsustainable
patterns
http://www.unep.org/dewa/vitalwater/jpg/0296-tariff-EN.jpg
Demand elasticity of water to price
Demand functions of water
Estimates in the literature
Sector
Estimates
Residential demand
-.33 / -.38
Industrial demand
-.44 / -.97 ; -.15 / -.98; -.10 / -0.79
Agriculture
-.48 to -1.24
Most studies based in developed countries.
Price elasticities from demand
functions
• Demand curves for water in particular sectors
• A demand curve explains water consumption as a
function of marginal prices and a set of other
important variables that influence consumption.
• Urban residential water demand:
– price, household income, family size, home and lot
size, weather...
Price elasticities from demand
functions
• Urban residential water demand:
– price, household income, family size, home and lot
size, weather...
• Industry and agriculture
– Demand as a function of industrial processes, of crop
choices and irrigation technology
– In the long-run industrial process and agricultural
technologies, including crops and land uses are
endogenous
Survey methods in the absence of
water markets
• Willingness to pay (WTP) is the maximum amount a person would
be willing to pay, sacrifice or exchange in order to receive a good (or
to avoid something undesired, such as pollution)
• A market transaction occurs when the price is equal or lower than
the WTP
• WTP as upper-bound to the price
• Several survey methods have been developed to measure
consumer willingness to pay.
– Hypothetical
– Actual