Using water bills to reinforce price signals: evidence from the USA

In areas subject to drought and/or high population growth, measures to encourage conservation have become an important part of water management and planning. Residential consumers' low sensitivity to prices reduces the effectiveness and desirability of using price signals as a conservation tool. We hypothesize that consumers' sluggish response to prices is partly due to the fact that price information is not conveniently available to them. If the hypothesis is true, including clear price information on water bills should reinforce consumers' sensitivity to price and therefore increase the power of price-based policies in demand management strategies. A standard aggregate water demand model is augmented with qualitative variables describing the informational content of bills and estimated using a cross section of US utilities. Our results indicate that a utility that spells out unit prices on the water bill can achieve the same level of conservation as others with a thirty to forty percent lower rate increase. We find no evidence that non-price information such as history of use or conservation messages has a significant effect on demand.