Consumption based water pricing and elasticities

The ‘big dry’ that has affected much of south-east Australia since 2001 has reduced the water in storage in many locations. To help balance water supply and demand, State governments and water utilities have used mandatory water restrictions to reduce demand by banning various outdoor uses.

As of March 2008, at least 75% of Australians live with mandatory water restrictions.

Surprisingly, until now, there has been no published demand-based analysis that measures the welfare cost of mandatory water restrictions in Australian cities. We address this gap by measuring the loss in Marshallian surplus associated with mandatory water restrictions in Sydney over the period 2004/2005.

Our results show that raising the volumetric price of water charged to households to achieve the same level of consumption would generate a much higher Marshallian surplus than the use of mandatory water restrictions.

The other aspects of our work are:
Reviewing existing Australian and International studies of water rationing;
Estimating the daily aggregate per capita water demand for Sydney;
Calculating the difference in Marshallian surplus from using a market-clearing price versus water restrictions, provide sensitive analysis and implications of the results.

Our achievements to date are:

• Grafton, R.Q. and M. Ward. Prices versus Rationing: Marshallian Surplus and Mandatory Water Restrictions. The Economic Record (2008).
  » view working paper online
  » view published paper [PDF, 126KB]
• Connell, D. and R.Q. Grafton. Planning for Water Security in the Murray-Darling Basin. Public Policy (forthcoming).
• Grafton, R.Q., T. Kompas and M. Ward. A Public Submission to IPART on ‘Review of Prices for Sydney Water Corporation’s Water, Sewerage, Stormwater and Recycled Water from 1 July 2008’. Submitted 12 October 2007.
• Presented a paper ‘Prices versus Rationing for Water’ at 3rd annual Water pricing Conference 27 September 2007.
• Presented paper ‘Public Good versus Private Gain’ at the Water Matters Symposium organized by Academy of the Social Sciences in Australia.
• Presented a paper ‘Instruments for Adaptive Water Management’ at NeWater Workshop on Adaptive Management.

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