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Residential water demand responds asymmetrically to rising and falling prices

: Schleich, Joachim; Hillenbrand, Thomas

Preprint urn:nbn:de:0011-n-5410517 (178 KByte PDF)
MD5 Fingerprint: 6e3d9a75ced1071365c7dbac3898f0fe
Created on: 07.08.2019

Applied Economics 51 (2019), No.45, pp.4973-4981
ISSN: 0003-6846
Journal Article, Electronic Publication
Fraunhofer ISI ()
water consumption; econometric; tariff; price elasticity; rebound; panel data

This paper econometrically estimates residential water consumption in Germany between 2007 and 2013 based on a panel of almost 3000 supply areas. In particular, the analysis distinguishes periods of rising and falling water and sewage water prices. The short-run (long-run) price elasticity is estimated at around 4.2% (13%), but water demand appears to respond asymmetrically to rising and falling prices. When prices are rising, the short-run (long-run) price elasticity is around 6.5% (17%). When prices are falling, the short-run price elasticity is not statistically different from zero, and the long-run price elasticity is estimated at around 12%. Additional results illustrate that employing average prices instead of marginal prices results in substantially overestimating the price elasticity. These findings are particularly relevant for utilities and regulators planning to alter the tariff structure towards a higher fixed fee and a lower volumetric fee.