The Value of Scarce Water: Measuring the Inefficiency of Municipal Regulations
Rather than allowing water prices to reflect scarcity rents during periods of drought-induced excess demand, policy makers have mandated command-and-control approaches, like the curtailment of certain uses, primarily outdoor watering. Using unique panel data on residential end-uses of water, we examine the welfare implications of typical drought policies. Using price variation across and within markets, we identify end-use specific price elasticities. Our results suggest that current policies target water uses that households, themselves, are most willing to forgo. Nevertheless, we find that use restrictions have costly welfare implications, primarily due to household heterogeneity in willingness-to-pay for scarce water.
For comments and guidance, we are grateful to Patrick Bayer, Nathaniel Keohane, Sharon Oster, Robert Stavins, Christopher Timmins, and seminar participants at Yale, Harvard, Dartmouth, Columbia, Camp Resources, the California Occasional Workshop on Environmental Economics, and the University of Maryland. The authors, alone, are responsible for any errors. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Mansur, Erin T. & Olmstead, Sheila M., 2012. "The value of scarce water: Measuring the inefficiency of municipal regulations," Journal of Urban Economics, Elsevier, vol. 71(3), pages 332-346. citation courtesy of