Does Marginal Price Matter?

A Regression Discontinuity Approach to Estimating Water Demand

Published in: Journal of Environmental Economics and Management, v. 61, no. 2, Mar. 2011, p. 198-212

Posted on RAND.org on February 28, 2011

by Shanthi Nataraj, W. Michael Hanemann

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Although complex pricing schedules are increasingly common among water and electricity providers, it is difficult to determine whether consumers respond to changes in the pricing schedule because price changes are often confounded with simultaneous demand shocks or non-price policies. To overcome this challenge, we exploit a natural experiment – the introduction of a third price block in an increasing block pricing schedule for water – in Santa Cruz, California. Using a regression discontinuity design, we find that consumers do respond to changes in marginal price. Doubling marginal price leads to a 12% decrease in water use (500 cubic feet per bill) among high-use households.

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