The Welfare Consequences of the 2015 California Drought Mandate: Evidence from New Results on Monthly Water Demand

In response to the severe California drought, in April 2015, Governor Jerry Brown issued an executive order mandating statewide reductions in water use. The mandate aimed to reduce the amount of water consumed statewide in urban areas by 25% from 2013 levels. The State Water Resources Control Board (SWRCB) proposed regulatory instructions that grouped urban water utilities into nine tiers, with conservation standards ranging from 8% to 36%. In this paper we evaluate welfare losses caused by this mandate. Understanding the proposed regulation’s welfare losses requires estimating water demand. Using fixed effect models and data from 2004 to 2009 on 111 urban water utilities, an annual demand curve is estimated. The estimated demand elasticity is between -0.61 and -0.1 which is heterogeneous across the regions and seasons. In the second step, we use the estimated annual demand function to recover price elasticities for a sample of 53 urban water utilities in California, which provide water for more than 20 million customers. We considered two scenarios to calculate welfare losses in Northern and Southern California: the governor’s mandate, and a hypothetical 25% uniform cut back. The results for Northern California indicate an average welfare loss of $6,132 per acre-foot of shortage for a governor’s mandate and $4,424 for a 25% uniform shortage. In Southern California, the average estimated welfare loss is $2,113 per acre-foot of shortage for a governor’s mandate and $2,171 for a 25% uniform shortage. Results indicate the monthly household-level willingness-to-pay to avoid the governor’s mandate is $36 in Northern California and $25 in Southern California.