Residential Demand for Water in the Lower Hunter Valley: Estimates and Policy Implications

Abstract

The nature of pricing and data collection policies adopted by water supply authorities is such that estimation of residential demand for water in Australia has been extremely difficult. Consequently, because there is a lack of information regarding consumer preferences, the confidence with which water supply authorities can proceed with policy change is undermined. Motivation for the present study arose from the desire to improve the level of knowledge about residential demand for water, especially in view of a proposal by the Hunter District Water Board to change its pricing policy. A single-equation model suitable for evaluating residential water demand was formulated after examination of theoretical, empirical and a priori considerations. This model was estimated using data from the Hunter District Water Board and a household survey. The dependent variable was 'intended water use' which is a proxy for quantity demanded and is based on consumers' willingness-to-pay valuations. Model estimation established that there is a causal relationship between intended water use and independent variables representing wealth, household size, previous water use, income, water price and connection to sewerage. The price elasticity of demand for water (at the point of means) was estimated to be -0.181 and the income elasticity of demand for water (at the point of means) was estimated to be 0.07. The absolute value of each of these elasticities was significantly greater than zero and significantly less than unity in the statistical sense.