Household characteristics and the elasticity of demand for water

• Survey data indicates that households have low levels of awareness of their marginal water price which undermines the incentives intended in the water tariff structure.

• Researchers provide selected households with accurate information on the marginal water price they face to measure whether this would elicit a behavioural response and how this response would vary across households with different levels of intra-household cooperation.

• The results of the research will be of relevance to utility providers across Zambia and could inform implementation of smart meters and information campaigns.

A household’s water usage has negative externalities on current and future users of the resource when water resources are scarce. If piped water is delivered by a water utility, this externality can be addressed by setting the price paid by each user equal to the marginal social cost. However, this incentive structure breaks down when end users do not understand their marginal water price. Moreover, individual prices are typically infeasible: the best the utility can do is set prices at the household level. If household members are not completely altruistic toward one another or if cooperation fails because of difficulties in enforcing individual consumption levels, then individual behaviour may only partially internalise the water price faced by the household.

The study proposes to investigate how greater awareness of prices affects water consumption. Moreover, the study will examine if households with lower levels of cooperation are less price sensitive in their water consumption?

The proposed research will take place in Livingstone, Zambia, a city of around 140,000 inhabitants. The project arose as a result of an earlier collaboration between the principle investigator and the implementing partner, Southern Water and Sewerage Company (SWSC), which serves 16,000 residential customers in the city.

The pilot phase of the project confirms that households have a low level of awareness of their water price, their consumption and how their bill is calculated. This lack of awareness undermines the price incentive that an increasing water tariff is intended to deliver. This also creates a research opportunity: providing selected households with accurate information about their marginal prices serves as a shock to their price beliefs and may thus elicit a measurable behavioural response.

As part of the intervention selected households will be given information about the true price of water they face and the water utility company’s commitment to honest billing practices. In addition, some households will be informed that lowering monthly water usage will qualify them to participate in a lottery with cash prizes.

The research findings will be of direct interest to policy makers in Zambia, who are very concerned about moderating water usage, and have adopted the increasing block tariff as an approach to discouraging wasteful consumption. Without a more complete understanding of the barriers to and determinants of consumer responses to water prices, policiesmay have limited effectiveness. Moreover, the results may provide insight on analogous problems with electricity and other resources in which a household’s consumption of a good or service priced at the household level generates externalities.