The economics of household demand for water: The case of Kandy municipality, Sri Lanka

Abstract

This study estimates the demand for domestic water in a fast-growing city of a developing country. Monthly data for 40 randomly selected households for a six-year period were used for the estimation. There were three price hikes during the study period, which provided adequate variation in the prices for an econometric estimation. A log-log model was selected as a proper specification for the demand function. Marginal price, difference price, income, and household size were used as the independent variables. After correcting the data for auto-correlation and heteroscedasticity, the final model was estimated. Results show all the expected signs with statistical significance. Price elasticity (marginal) and income elasticity for water in the study area are estimated to be - 0.34 and 0.08, respectively. Thus, our findings confirm the previous findings that water is neither price-nor income-elastic. Given these responses, a price hike may not help conserve water in the study area. However, very low price responsiveness can be used to increase water revenues of the municipality.