The role of price in determining residential water demand, water pricing and residential water demand in municipalities in the Western Prairies

Abstract

Municipal water systems in Canada generally are under financed to either replace depreciating systems or expand to meet growing demands. One method to increase revenues to finance water systems is on a user pay basis. This would result in municipal water rates increasing. However the relationship between price and water demand will influence the changes in demand to changes in price and ultimately system revenues. The extent of the price/water relationship is an empirical question that needs to be answered before municipal systems can accurately develop water rates that will serve the desired revenue needs. Given that residential water usage on the prairies represents over half of municipal consumption this group will be studied as to the impact of price upon the quantity of water demanded. This thesis will review the literature dealing with estimating a residential water demand model, develop a model for the Western Prairies and determine what impact price may have upon water usage. The conclusions of the study are the following; water demand is inelastic with respect to water prices however it appears to be more responsive during outdoor demand periods when extra consumption is supplemental to the set of water consuming goods held by each household. Consumers in general face complex water rate schedules which complicates each consumers ability to determine the marginal water rate. On the average, water costs are a very minor percentage of household income and that water rates do not reflect the actual costs involved with a water distribution system with respect to system replacement and service costs. Research results indicate that at observed values, water demand is inelastic and increased water prices will result in system revenues to increasing.