Urban Water Conservation: Comparing Urban Water Conservation: Comparing Price and Non-price PoliciesPrice and Non-price Policies

Sheila M. OlmsteadSheila M. OlmsteadYale UniversityYale University

Federal Reserve Bank of AtlantaFederal Reserve Bank of Atlanta

June 17, 2009June 17, 2009

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Drought-Stricken South Facing Tough Choices

October 16, 2007

State eases water rules, but urges restraintAtlanta Journal-ConstitutionJune 10, 2009

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Water Demand and PricesWater Demand and Prices

On average, a 10% increase in the price of On average, a 10% increase in the price of water reduces residential demand by 3 to 4% in water reduces residential demand by 3 to 4% in U.S. cities.U.S. cities.

This is similar to the price sensitivity of This is similar to the price sensitivity of residential electricity demand.residential electricity demand.

The response of water demand to price The response of water demand to price increases is stronger:increases is stronger: under higher prices; andunder higher prices; and in the long run.in the long run.

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Water Rationing

Outdoor watering may be restricted to a certain number of days per week, or banned altogether.

Technology Standards

Typical non-price conservation policiesTypical non-price conservation policies

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 Water Demand and Non-price Conservation PoliciesConservation Policies

Non-price conservation policies can reduce Non-price conservation policies can reduce water demand, though effectiveness varies.water demand, though effectiveness varies.

Mandatory policies (well-enforced) have stronger Mandatory policies (well-enforced) have stronger effects than voluntary policies and education.effects than voluntary policies and education.

Water savings from promoting water-conserving Water savings from promoting water-conserving fixtures may be smaller than expected, due to fixtures may be smaller than expected, due to behavioral responses.behavioral responses.

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Comparing Price and Non-price Comparing Price and Non-price Conservation PoliciesConservation Policies

Cost effectivenessCost effectiveness

Monitoring and enforcementMonitoring and enforcement

Equity considerationsEquity considerations

Political feasibilityPolitical feasibility

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Prices achieve conservation Prices achieve conservation cost-effectivelycost-effectively

Households and firms decide how to reduce Households and firms decide how to reduce consumption, and by how much.consumption, and by how much.

Households and firms with different costs and Households and firms with different costs and benefits of water use can react differently.benefits of water use can react differently.

Water use reductions occur among users with Water use reductions occur among users with the lowest value for water use.the lowest value for water use.

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Monitoring and EnforcementMonitoring and Enforcement

Non-price policies require significant monitoring Non-price policies require significant monitoring and enforcement.and enforcement.

How to report water cheatersAtlanta Journal-ConstitutionOctober 19, 2007

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

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Equity ConsiderationsEquity Considerations

Low-income households tend to contribute a greater Low-income households tend to contribute a greater share of aggregate water demand reductions when share of aggregate water demand reductions when prices increase, in comparison to non-price policies.prices increase, in comparison to non-price policies.

This does NOT mean that price-based approaches This does NOT mean that price-based approaches are regressive.are regressive.

Progressive price-based approaches can be designed.Progressive price-based approaches can be designed.

The equitability of non-price policies depends on how The equitability of non-price policies depends on how they are financed.they are financed.

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Political FeasibilityPolitical Feasibility

Raising water prices is politically difficult.Raising water prices is politically difficult.

Ironically, non-price policies may be more Ironically, non-price policies may be more costly (though costs are less transparent).costly (though costs are less transparent).

Economic costs of prescriptive approachEconomic costs of prescriptive approach

Utility budget deficits often require price increases Utility budget deficits often require price increases after “successful” non-price conservation policies.after “successful” non-price conservation policies.