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Price Responsiveness of Residential Water Demand

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Abstract:

Appropriate water pricing policies can improve water use efficiency and augment revenues, thereby improving and expanding pipe-borne water supply services. Designing an appropriate pricing policy and efficient planning and management of pipe-borne water supply systems require an understanding of the determinants of water demand. The quantification of pipe-borne water demand assists water utility operators and policy makers in predicting consumption responses to changes in water pricing, by indicating the effectiveness of demand management. The total water consumption of pipe-borne water supplies has increased from 275 million cubic metres in 1995 to 396 million cubic metres in 2006 (Figure 4.1). The annual consumption of water through individual services covering domestic, commercial, industrial and institutional use has increased by 116 million cubic metres during the last decade (1995 to 2005). Residential water use was estimated at 243 million cubic metres accounting for 63.5 per cent of total water produced by the NWSDB and 46 per cent of the total revenue collected in 2005.

This chapter presents the analysis of residential demand for pipe-borne water in Sri Lanka in order to quantify residential consumer's responses to pipe-borne water price changes. One of the main objectives of the book is to evaluate the welfare effects of alternative water pricing rules. Therefore, the parameter estimates of this chapter, along with the findings of chapter 5 and 6 will be used to test the efficiency of various price reforms in chapter 7. The price responsiveness of residential water demand is dependent on a number of factors including prices, size of the household, income, temperature and rainfall.

At present, residential water use accounts for the largest share of total pipe-borne water consumption and is subjected to extensive subsidies. Continuous supply of water at the current rates may eventually lead the collapse of the water supply system (Gunathilake, et al., 2001). This chapter provides insights into the potential role of prices as a residential demand management tool. Price elasticity of residential demand, defined as the percentage change in quantity demanded of water in response to one per cent change in the price of water, is the key policy variable of interest that can be derived from the water demand function.

Document Type: Research Article

DOI: http://dx.doi.org/10.5848/CSP.3426.00004

Publication date: January 1, 2011

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