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The Value of Free Water: Analyzing South Africa's Free Basic Water Policy

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  • Andrea Szabó

Abstract

This paper analyzes South Africa's Free Basic Water Policy, under which households receive a free water allowance equal to the World Health Organization's recommended minimum. I estimate residential water demand, evaluate the welfare effects of free water, and provide optimal price schedules derived from a social planner's problem. I use a data set of monthly metered billing data for 60,000 households for 2002–2009 from a particularly disadvantaged suburb of Pretoria, with rich price variation across 20 different nonlinear tariff schedules. I find that the free allowance acts as a lump‐sum subsidy, without large effects on water consumption. However, it is possible to reallocate the current subsidy to form an optimal tariff without a free allowance, which would increase welfare while leaving the water provider's profit unchanged. This optimal tariff would also reduce the number of households consuming low quantities of water, a desirable policy goal according to the WHO.

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  • Andrea Szabó, 2015. "The Value of Free Water: Analyzing South Africa's Free Basic Water Policy," Econometrica, Econometric Society, vol. 83(5), pages 1913-1961, September.
    • Handle: RePEc:wly:emetrp:v:83:y:2015:i:5:p:1913-1961
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    Cited by:

    1. Wichman, Casey J. & Taylor, Laura O. & von Haefen, Roger H., 2016. "Conservation policies: Who responds to price and who responds to prescription?," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 114-134.
    2. Suchita Srinivasan, 2023. "Social Policies and Adaptation to Extreme Weather: Evidence from South Africa," CER-ETH Economics working paper series 23/381, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    3. Wang, Xiangrui & Lee, Jukwan & Yan, Jia & Thompson, Gary D., 2018. "Testing the behavior of rationally inattentive consumers in a residential water market," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 344-359.
    4. Gregory Cox, 2018. "Almost Sure Uniqueness of a Global Minimum Without Convexity," Papers 1803.02415, arXiv.org, revised Feb 2019.
    5. Cook, Joseph & Whittington, Dale & Fuente , David & Matichich, Michael, 2019. "A Global Assessment of Non-Tariff Customer Assistance Programs in Water Supply and Sanitation," EfD Discussion Paper 19-4, Environment for Development, University of Gothenburg.
    6. R. Aaron Hrozencik & Dale T. Manning & Jordan F. Suter & Christopher Goemans, 2022. "Impacts of Block‐Rate Energy Pricing on Groundwater Demand in Irrigated Agriculture," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(1), pages 404-427, January.
    7. Nauges, Celine & Whittington, Dale, 2017. "Evaluating the Performance of Alternative Municipal Water Tariff Designs: Quantifying the Tradeoffs between Equity, Economic Efficiency, and Cost Recovery," World Development, Elsevier, vol. 91(C), pages 125-143.
    8. Wichman, Casey & Cunningham, Brandon, 2017. "Notching for Free: Do Cyclists Reveal the Value of Time?," RFF Working Paper Series 17-17, Resources for the Future.
    9. Wichman, Casey, 2024. "Efficiency, Equity, and Cost-Recovery Trade-Offs in Municipal Water Pricing," RFF Working Paper Series 24-18, Resources for the Future.

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