Equity, Price Elasticity, and Household Income Under Increasing Block Rates for Water

Abstract . For an examination of the relationships between household income levels and residential water use, individual household survey data from Tucson, Arizona the combined with monthly water use data for these same households. The objectives were to examine individual response to the existing block rate pricing structure and to provide policy conclusions on potential improvements in this rate structure. A simultaneous equation model of demand is estimated for households within each income group to determine the price elasticity of demand for each income group. The demand models show that under the existing increasing block rate pricing schedules, higher income households not only use more water, but have lower elasticities of demand. Thus a uniform proportional rate increase will cause a larger percentage drop in water use among low income households than among high income households. Given the assumption of declining marginal utility of water use, this result leads to a policy recommendation for substantially steeper block rates to improve interpersonal equity in water pricing.