Price Impact on the Demand for Water and Energy in California Residences

This paper provides a summary of research to estimate the household price elasticities for natural gas, electricity, and water in California. First, we introduce two problems that complicate existing estimate of the price elasticity of demand for these household goods: block rate pricing and joint consumption. Next we summarize estimates of the price elasticity of demand in the literature. These estimates vary widely across regions, time periods, and statistical techniques, making it difficult to use these estimates for policy purposes. We address this problem in the third section of the paper, and present statistical methods for estimating price elasticity in the case of block rates and joint consumption. In section four, we present preliminary estimates of the price elasticity of demand for natural gas, electricity, and water in California, using these statistical methods. The paper concludes with a short discussion of the results, and their possible policy implications. The regression estimates reported in this paper suggest that the price elasticity of demand for natural gas, electricity, and water is lower than is commonly reported in the literature. Coupled with global warming and rising electricity and water use, our price elasticity findings suggest a need for strong non-price and price conservation measures to effectively manage these resources.