Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1402: 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
Additional contact information
Mikael Elinder: Department of Economics, Uppsala University, Postal: and Research Institute of Industrial Economics (IFN), Stockholm, Sweden ,
Xiao Hu: Department of Forest Economics and Center for Environmental and Resource Economics (CERE), Postal: Swedish University of Agricultural Sciences (SLU), UmeƄ, Sweden
Che-Yuan Liang: Institute for Housing and Urban Research (IBF) and Department of Economics, Postal: Uppsala University

Abstract: 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.

Keywords: esidential water consumption; Water conservation; Common pool problem; Free-riding; Individual metering and billing

JEL-codes: D12; Q21; Q25; Q28

24 pages, September 6, 2021

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