Urban water pricing and drought management

In periods of drought, urban water systems commonly rely on nonmarket programs to induce temporary conservation, leaving the marginal price of water unchanged; an alternative is to raise the price. Using pooled cross‐sectional and time series observations on single‐family residential customers of the Honolulu Board of Water Supply (1982), demand for water is estimated as a function of price, income, household size, rainfall, and a dummy variable denoting a water restrictions program. Short‐run elasticities suggest that an increase in marginal price of less than 40% would achieve a 10% reduction in water use, even during a drought episode. An accompanying conservation program would mitigate the necessary price increase, but only slightly.