Working Paper: NBER ID: w13513
Authors: Erin T. Mansur; Sheila M. Olmstead
Abstract: 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.
Keywords: water scarcity; municipal regulations; welfare implications; price elasticity; drought policies
JEL Codes: L51; L95; Q25; Q28; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Price-based policies (L11) | Outdoor water use (Q25) |
| Outdoor watering restrictions (Q25) | Outdoor water use (Q25) |
| Outdoor uses elasticity (H30) | Outdoor water use (Q25) |
| Price increases (E30) | Outdoor water use (Q25) |
| Price-based approach (L11) | Welfare gains (D69) |
| Current command-and-control policies (H56) | Deadweight loss (H21) |
| Shift to price-based policy (E64) | Efficient allocation of water resources (Q25) |