DO CONSUMERS REACT TO THE SHAPE OF SUPPLY?
WATER DEMAND UNDER
HETEROGENEOUS PRICE STRUCTURES
Sheila M. Olmstead
Yale University, School of Forestry and Environmental Studies
W. Michael Hanemann
University of California, Berkeley
Department of Agricultural and Resource Economics, and Goldman School of Public Policy
Robert N Stavins
John F. Kennedy School of Government, Harvard University
and Resources for the Future
June 3, 2005
The Author grew up on a Nebraska farm, and has long worried about the effects of Population growth and supply of Fresh Water. The cited Study is only for the Brave of Heart and economically-gifted.It concludes IBPs do not establish a Consumer response to a Water Supply curve, as some Economists have postulated. The interesting Point in the Study stands as the Researchers could not find a significant Price elasticity among Uniform rate Consumers, but found a Price elasticity among IBP rate Consumers, though a definitive answer for this response could not be determined.
The Study concludes that IBP rates still provide greater economic efficiency, due to greater assumption of the LRMC (Long Range Marginal Cost). The authors do not state as much, but probably accept that Command (administratively imposed) Water Conservation practice has the greatest efficiency. Some Readers are probably lost by this point, so the Author will try to clarify.
Command Water Conservation is costly and probably only about 70% effective in reaching restricted Water usage goals. Economists have advocated usage of IBPs to introduce greater Price elasticity, and Consumer recognition of the Water Supply Curve. Economists theorize such recognition by Consumers would be even more efficient than Price elasticity in inducing Water Conservation. The Study basically finds such recognition statistically not observable. lgl