No 2021:12: Water conservation and the common pool problem: Can pricing address free-riding in residential hot water consumption?

Mikael Elinder (), Xiao Hu () and Che-Yuan Liang
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Mikael Elinder: Department of Economics at Uppsala University, and Research Institute of Industrial Economics (IFN)
Xiao Hu: CERE - the Center for Environmental and Resource Economics
Che-Yuan Liang: Water is an increasingly scarce resource. It is often distributed such that consumers do not face any marginal cost of consumption, creating a common pool problem. For instance, tenants in multi-family buildings can often consume both hot and cold water at zero marginal cost. Using high-frequency data over many years, we analyze how the introduction of apartment-level metering and billing (IMB) affects hot water consumption. We find that introducing a marginal cost, reflecting the market price, decreases consumption drastically by 26%. Hence, price interventions can curb free-riding behavior and help the conservation of cheap but precious resources. Our results also show that heavy water users in the top consumption quartile account for 72% of the reduction. Moreover, cost-benefit calculations indicate that IMB for hot water is a cost-effective policy tool for reducing water and energy consumption.Institute for Housing and Urban Research (IBF) and Department of Economics at Uppsala University