The purpose of this study is to explore the effect of price on residential water use in public water supply systems in Georgia's Coastal region. Particular attention is focused on measures for the elasticity of demand for residential water use inasmuch as a showing of price inelasticity may make the wider adoption of conservation pricing more palatable to small communities with concerns that raising water prices will reduce much-needed revenues.
To clarify the nature and importance of the elasticity measure, consider the following simplified example. A community sells 100 units of water for $1.00 per unit. Its' total revenues are $100. Suppose price is increased by 20% to $1.20, and that the units purchased falls by 30% to 70. Total revenues are now only $84.00. In this case, we say that demand is "elastic;" the quantity of water used by folks "stretches" relative to the change in price. With elastic demand, rising prices mean lower total revenues. Suppose, however, that with the 20% price increase, demand fell to only 90 units -- a 10% decrease. Total revenues are now $108. In this case we say demand is inelastic -- quantity doesn't really "stretch" much when prices rise. If demand is inelastic, rising prices means higher revenues.
From our limited, phase one efforts in these regards, we use aggregate water pricing data from 50 public water supply systems in 28 coastal counties that participated in a survey conducted during late the period 2003-2005. We find strong evidence that, at the margin, residential water use is indeed affected by prices charged for water in this region. We also find what we regard to be reasonably compelling evidence suggesting that residential water demand is inelastic over the range of marginal prices observed in our sample. This latter finding suggests that the use of conservation pricing as a tool for water conservation may not have an adverse effect on community revenues. Indeed, it may well be the case that increasing water prices will increase, not decrease, the community's revenues from the sale of water.
In moving to phase two of this work, a great more will be accomplished in terms of refinements in the nature and quality of data used; greater efforts will be placed on attempts to identify functional forms that will yield best estimates for residential water demand in the state. Our ultimate goal is to be capable of responding to the needs of Georgia communities in the coastal region for information related to how one might improve the design of a community's water rate structure, and to conservation pricing policies that will best serve their interests and the interests of the state. Working Paper Number 2005-007