Behavioral Responses to Two-Part Tariffs: Evidence from the Introduction of Volumetric Water Pricing

Water scarcity is a global challenge affecting more than 2 billion people for at least a few months each year. Economists advocate using the price mechanism to manage scarce water resources, based on the neoclassical economic theory assumption that consumers respond to marginal prices. However, consumers may not fully understand complex rate structures, such as two-part tariffs, which often aim to achieve multiple policy objectives. Patel investigates consumer responses to a shift from flat water rates to volumetric pricing in the City of Sacramento. On average, volumetric pricing decreases consumption by 3-5%, but there is significant heterogeneity across consumer groups. The lowest consumers, whose total bills decrease, increase consumption by 4-5%. This suggests that consumers do not respond to marginal prices, which has implications for the welfare effects of pricing policies and the effectiveness of using prices to manage demand.

Bio:
Praharsh Patel is a fifth-year Ph.D. candidate in Energy, Environmental, and Food Economics at Pennsylvania State University. His research focuses on water conservation policies and behavioral responses, with a particular interest in reactions to water and energy pricing in water-scarce regions of the United States and India. He is also a visiting scholar at Environment Market Labs (emLabs) at the University of California, Santa Barbara, where he contributes to the research agenda on agriculture in India. Prior to his Ph.D., Praharsh worked with the International Water Management Institute (IWMI) as a pre-doctoral fellow and policy research consultant. He holds a Master’s degree in Mathematics from the Indian Institute of Technology (IIT) Kanpur and a Bachelor’s degree in Physical Sciences from St. Stephen’s College, New Delhi, India.