Modeling commercial demand for water: Exploring alternative prices, instrumental variables, and heterogeneity

Abstract

In this paper, we introduce a previously unused instrumental variable to estimate the elasticity of commercial water demand for firms served by a large municipal utility. We then present evidence that firms are more responsive to one-period lagged average price than marginal price. Finally, we find notable differences in elasticity among different categories of businesses. The findings in this paper are particularly important as water utilities consider how to maintain revenue while coping with limited water supplies and increasing commercial demand. (JEL Q31).