Urban Water Conservation: Comparing Price and Non-price Policies Sheila M. Olmstead Yale University Federal Reserve Bank of Atlanta June 17, 2009

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3 Drought-Stricken South Facing Tough Choices October 16, 2007 State eases water rules, but urges restraint Atlanta Journal-Constitution June 10, 2009

06/17/20094 Water Demand and Prices On average, a 10% increase in the price of water reduces residential demand by 3 to 4% in U.S. cities. On average, a 10% increase in the price of water reduces residential demand by 3 to 4% in U.S. cities. This is similar to the price sensitivity of residential electricity demand. This is similar to the price sensitivity of residential electricity demand. The response of water demand to price increases is stronger: The response of water demand to price increases is stronger: under higher prices; and under higher prices; and in the long run. in the long run.

06/17/20095 Water Rationing Outdoor watering may be restricted to a certain number of days per week, or banned altogether. Technology Standards Typical non-price conservation policies Federal law requires low-flow plumbing fixtures in new construction. Cities and states may also require retrofitting.

06/17/20096 Water Demand and Non-price Conservation Policies Non-price conservation policies can reduce water demand, though effectiveness varies. Non-price conservation policies can reduce water demand, though effectiveness varies. Mandatory policies (well-enforced) have stronger effects than voluntary policies and education. Mandatory policies (well-enforced) have stronger effects than voluntary policies and education. Water savings from promoting water-conserving fixtures may be smaller than expected, due to behavioral responses. Water savings from promoting water-conserving fixtures may be smaller than expected, due to behavioral responses.

06/17/20097 Comparing Price and Non-price Conservation Policies Cost effectiveness Cost effectiveness Monitoring and enforcement Monitoring and enforcement Equity considerations Equity considerations Political feasibility Political feasibility

06/17/20098 Prices achieve conservation cost-effectively Households and firms decide how to reduce consumption, and by how much. Households and firms decide how to reduce consumption, and by how much. Households and firms with different costs and benefits of water use can react differently. Households and firms with different costs and benefits of water use can react differently. Water use reductions occur among users with the lowest value for water use. Water use reductions occur among users with the lowest value for water use.

06/17/20099 Monitoring and Enforcement Non-price policies require significant monitoring and enforcement. Non-price policies require significant monitoring and enforcement. How to report water cheaters Atlanta Journal-Constitution October 19, 2007 Cheating on a water price increase requires that users consume water off-meter – more difficult. Cheating on a water price increase requires that users consume water off-meter – more difficult.

06/17/ Equity Considerations Low-income households tend to contribute a greater share of aggregate water demand reductions when prices increase, in comparison to non-price policies. Low-income households tend to contribute a greater share of aggregate water demand reductions when prices increase, in comparison to non-price policies. This does NOT mean that price-based approaches are regressive. This does NOT mean that price-based approaches are regressive. Progressive price-based approaches can be designed. Progressive price-based approaches can be designed. The equitability of non-price policies depends on how they are financed. The equitability of non-price policies depends on how they are financed.

06/17/ Political Feasibility Raising water prices is politically difficult. Raising water prices is politically difficult. Ironically, non-price policies may be more costly (though costs are less transparent). Ironically, non-price policies may be more costly (though costs are less transparent). Economic costs of prescriptive approach Economic costs of prescriptive approach Utility budget deficits often require price increases after successful non-price conservation policies. Utility budget deficits often require price increases after successful non-price conservation policies.