Urban Water Demand: Income and Price Elasticities

ABSTRACT We use bimonthly water consumption data from 580,000 households in the metropolitan region of Western Australia over the period 2015–2020 to analyse urban residential water demand. A generalised two‐stage least squares (G2SLS) approach is used to estimate water consumption as a function of price, household income, weather variables, property characteristics and user type. The short‐run (SR) own‐price elasticity estimates are −0.09 and −0.27 for winter and summer demand, respectively; and the corresponding long‐run (LR) own‐price elasticity estimates are −0.25 and −0.89. SR income elasticity estimates for winter and summer are 0.03 and 0.21, respectively, whereas the corresponding LR income elasticity estimates are 0.08 and 0.69. Estimates for various subgroups demonstrate that income elasticity is proportional to own‐price elasticity, suggesting that residential water demand is consistent with the assumption of strong separability. These findings suggest that effective water demand management could incorporate dynamic pricing alongside the promotion of tools and knowledge aimed at improving outdoor water‐use efficiency.