Water Demand Modeling

Emanuele MassettiFEEM and CMCC

Prepared for the Capacity Building Programme on the Economics of Adaptation2nd 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

dx.cooperhewitt.org artandfoodofitaly.blogspot.com

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 investmentsThe 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

units

supply

demand

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 literatureSector 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