Are the Consumers Always Ready to Pay? A Quasi-Almost Ideal Demand System for the Italian Water Sector

Although drinking water amounts to 1.03% of the total water available daily for Italian consumers, this service is not easily replaced with other goods. Water is a basic need, and its consumption should be ensured for everyone. Yet the scarcity of this resource implies that any loss should be strongly discouraged. These countervailing incentives regarding water consumption should be considered by the regulator when determining the optimal final tariff. I estimate a complete quasi—almost ideal demand system using Italian households data from 1999 to 2005 in order to verify the effects—on different types of Italian consumers—of a 1% rise in water tariffs. First, the results demonstrate that the mean of water elasticity (with respect to price and income) for Italian consumers is aligned with consumers in other European countries. Second, the paper establishes that a rise in the water tariff leads to a small contraction in expenditures on personal care and non essential goods. Finally, this paper shows that a change in the water tariff affects senior citizens and the population of southern Italy more than other consumer types. The regulator should consider all these effects when determining the final pricing policy. Copyright Springer Science+Business Media B.V. 2011