Price elasticity of the demand for water in Southern California

Summary

In summary, we can state that econometric evidence suggests an elasticity of -.35 for household uses in Southern California. This is comprised of elasticities of -.24 and -.7 for inside and outside uses respectively.

The data on industrial demand is less evident, but suggests an elasticity of well above -1.0 for low prices of water, that is, before recirculation systems have been installed. Only those using ground water or brackish water are paying prices around 5¢ per thousand gallons or $15 per acre-foot (Prices here mean the cost of pumping and sometimes for a pumping tax of acquiring such water.). If these industries should begin paying marginal costs of supplying water, then we can expect a substantial reduction in water consumption by them as they use recirculation systems. For industries which derive water from municipal supplies, they are already paying relatively high prices for water and therefore have already initiated water saving devices. For them the price elasticity is probably quite low, around -.2 or highly inelastic.

In agriculture, with substantial opportunity for factor substitution, but less than expected possibilities of pricing crops out of production, an elasticity of-.5 seems appropriate, although this figure must be interpreted with caution as the data is just not available to confirm this estimate.

Combining the above, the fresh-water demand for water will be in the neighborhood of -.3, as municipal demands are the dominant factor determining demand in Southern California. An elasticity of -.3 which is actually rather close to previous studies, is still less elastic than most. However, these conclusions must be tentative awaiting the results of another half year of study on a very complex market for water.