Research Project

The Effects of Price Changes on Water Consumption and Bill Payment: Evidence from Bangalore

Investigator: CDEP Fellow Evan Plous Kresch

In the face of increased scarcity and concerns over water supply sustainability, there has been substantial discussion about the tools that water managers can use to effectively manage municipal water supplies. In order for economists and policymakers to effectively study the implications and welfare analyses of water management policies, it is crucial to have accurate estimates of a key parameter of these studies, namely the price elasticity of water demand.

While there is an existing literature that attempts to estimate this price elasticity, the large majority of these papers study water demand in developed country municipalities, and there are reasons to believe that estimates of the price elasticity of water demand in a developing country may differ significantly from those found in developed countries. Two possible factors that may lead to the different elasticity estimates in a developing country are the low median household income and generally weak legal enforcement found in these settings. Moreover, the papers that have estimated the price elasticity in developing countries have generally not addressed a key observation: in settings with weak legal enforcement, there is little incentive for residents to pay their water bills and non-payment is fairly high.

In this project, the author studies the effect of price changes on both the change in water consumption and bill payment behavior in a developing country setting. The project uses the change of the increase block pricing (IBP) schedule for piped water at the Bangalore Water Supply and Sewerage Board (BWSSB) in 2005 and 2010 to analyze the change in monthly water consumption of residents in Bangalore before and after the price increase. The author also looks at whether there was a significant drop in the proportion of residents who pay their water bill due to the price change and also studies how the change in monthly water consumption differs between residents based on bill payment behavior.

This project is part of CDEP's Human Capital Initiative