Estimation of Residential Water Demand with Imperfect Price Perception

Using data from a household survey carried out in the French overseas territory of Réunion, we investigate the price of drinking-water perceived by households faced with an increasing, multi-step pricing scheme. To this purpose we use an improved version of the method introduced by Shin (Rev Econ Stat 67(4):591–598, 1985) to estimate the demand for residential water when consumers are imperfectly informed about their pricing schedule. The empirical results suggest that Réunion households underestimate the price of water and thus consume more than what is economically rational. Providing information to households about the marginal price of water may be an innovative means of inducing them to respond to pricing policies designed to promote water conservation.