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Regional Differences in the Price Elasticity of Residential Water Demand in Spain

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Abstract

This paper explores the influence of regional climate variability on the elasticity of price for residential water demand in Spain. The data comes from the Spanish Survey of Family Budget (INE 2012), a national based survey of household living conditions including more than 15,000 observations. The econometric analysis included other determinants of residential water demand in Spain such as income and household characteristics. In line with the broad literature, the demand for water in Spain is found to be inelastic, although price elasticity differs notably when accounting for different climatic regions in the territory. The results have noteworthy policy implications as water pricing is considered an efficient means of long term sustainable planning of water resources management. The results imply that policy makers may have reasons to explore differentiating the impacts of water efficiency measures by region.

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Notes

  1. The approval of the European Directive in 2000 established a paradigmatic shift in the public management of water resources, not only in regards to its main objective (i.e. improving the environmental quality of European waters) but in the use of economic analysis as one of the main pillars for its implementation (Union 2000; Kristensen et al. 2013; Tsakiris 2015).

  2. There is a growing theoretical literature suggesting that income elasticity is unlikely to be constant (Barbier et al. 2016). As suggested by an anonymous reviewer, other non-linear more flexible relationships, such as Box-Cox transformation of dependent and explanatory variables, were investigated. However, we found a non-significant lambda parameter suggesting that the semi-logarithmic functional form fits the data best in this particular setting.

  3. White’s (1980) test is used to test the presence of heteroscedasticity in the error term and, under the null hypothesis of homoscedasticity, the test value is Chi2 (181) = 679.95 (p value <0.001). Therefore, we reject the null hypothesis and display robust standard errors.

  4. Population indicators are often used in the literature to instrumentalise prices. Schleich and Hillenbrand (2009) use natural logarithm of population and population density as instruments.

  5. The usually used Sargan (1958) and Basmann (1960) overidentification tests are not robust under heteroscedasticity since they assume that the errors are independent and identically distributed.

  6. The income elasticity is calculated computing the mean of the individual-specific elasticities using household income level.

  7. In a previous model excluding climatic conditions we found statistically significant differences in water demand between regions in Spain: compared with the Central region, warmer regions (i.e. Western, Southern and Canary Islands) were found to have statistically significant higher water demand and colder regions (Northern) lower.

  8. Variable HOTWATER is not a good instrument for PRICE in the regression of the East Region according to Wooldridge’s (1995) robust score test. As a consequence, RENTALPERICEm2 is used as a second instrument in the East Region. RENTALPERICEm2 is the mean rent price for m2 of a house with the same characteristics (province, size, residential area, type of building).

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Acknowledgements

Financial support by the University of the Basque Country (UPV/EHU) under research grants UFI11/03 and US15/11, by the Department of Education of the Basque Government through Grant IT-642-13 (UPV/EHU Econometrics Research Group) and IT-783-13 (BIRE-Bilbao Research Economics) and by the Spanish Ministry of Economy and Competitiveness through grant ECO2014-52587-R is gratefully acknowledged.

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Authors and Affiliations

  1. Department of Applied Economics III (Econometrics and Statistics), University of the Basque Country (UPV/EHU), Faculty of Economics and Business, Bilbao, Spain

    David Hoyos

  2. EKOPOL, Research Group on Ecological Economics and Political Ecology, University of the Basque Country (UPV/EHU), Bilbao, Spain

    David Hoyos

  3. Department of Applied Economics II (Public Finances and Tax Law), University of the Basque Country (UPV/EHU), Faculty of Economics and Business, Bilbao, Spain

    Alaitz Artabe

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  1. David Hoyos
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  2. Alaitz Artabe
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Correspondence to David Hoyos.

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Appendix 2: Literature review

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Hoyos, D., Artabe, A. Regional Differences in the Price Elasticity of Residential Water Demand in Spain. Water Resour Manage 31, 847–865 (2017). https://doi.org/10.1007/s11269-016-1542-0

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