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Show WATER PRICING POLICY STUDY PRICE ELASTICITY OF DEMAND The Act calls for the estimation of demand elasticity for each of the principal categories of end use of water within the District boundary. This study defined those categories as residential, commercial, industrial, and agricultural. This definition is essentially consistent with a delineation of recognized customer sectors. Price elasticity is defined as the percent change in demand resulting from a one percent change in price. It is typically referred to as a number in absolute terms, although it is almost always a negative number ( suggesting that an increase in price will result in a decrease in demand). If price elasticity is less than unitary ( which all studies that have been reviewed suggest), an increase in the price level will increase revenues. This implies that revenue sufficiency is not likely to be a concern. It may imply, however, that a water agency that increases its price level will collect more revenue than is necessary. Nationally, the range of residential marginal price elasticity estimates is - 0.2 to - 0.5. In findings from Utah and Arizona, the range seems to be somewhat higher. Based on the findings of the Case Study, a residential elasticity of - 0.592 is appropriate. A range of reasonable marginal price elasticity estimates for commercial customers is - 0.25 to - 0.50. Commercial water use represents roughly 20 percent of use in the service area. Reconciling Hansen's12 findings with the residential elasticity and relative water sales leads to the conclusion that the appropriate value for use in the CUWCD service area is probably near the low end of the range. An estimate of - 0.25 is proposed. Based on Renzetti's13 British Columbia findings, an appropriate range of elasticities for industries typical to Utah would be - 0.25 to - 0.54. It is proposed that the low end of the range, - 0.25, be used for the same reason given for commercial elasticities. Based on information found in the literature, the elasticity of demand for irrigation water will likely be low ~ somewhere in the range of - 0.20 for irrigation water at prices charged for CUP water. 14 12Hansen, Roger D., and Rangesan Narayanan. " A Monthly Time Series Model of Municipal Water Demand," Water Resources Bulletin Vol. 17, No. 4 ( 1981): 578- 85. 13Renzetti, Steven, " An Econometric Study of Industrial Water Demands in British Columbia, Canada," Water Resources Research, Vol. 24, No. 10 ( October 1988): 1569- 73. 14Gardner, B. Delworth. " Water Pricing and Rent Seeking in California Agriculture" In Anderson, Terry L., ed., Water Rights: Scarce Resource Allocation, Bureaucracy, and the Environment. Pacific Institute for Public Policy Research, 1983, Chapter 3, pp. 83- 113. Executive Summary ES- 32 |
