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Reconsidering the Economics of Demand Analysis with Kinked Budget Constraints

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  • Aaron Strong
  • V. Kerry Smith

Abstract

This paper has two objectives. First, we identify a problem with the ability of the discrete-continuous choice (DCC) framework and conditional demand functions to fully describe consumer preferences in the presence of kinked budget constraints. Second, we propose and illustrate an alternative, preference based, method for estimating consumer responses to price changes under these conditions. Our preference based approach yields price elasticities on the order of 0.4 and a "utilities expenditure" elasticity of near unity. This research highlights the possibility that households may be more sensitive to price schedules than previously thought. It is recognizes commitments to commodities such as pools or outdoor landscaping influence how water consumption responds to price changes as part of the long run adjustments.

Suggested Citation

  • Aaron Strong & V. Kerry Smith, 2008. "Reconsidering the Economics of Demand Analysis with Kinked Budget Constraints," NBER Working Papers 14304, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:14304
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    Cited by:

    1. H. Allen Klaiber & V. Kerry Smith & Michael Kaminsky & Aaron Strong, 2014. "Measuring Price Elasticities for Residential Water Demand with Limited Information," Land Economics, University of Wisconsin Press, vol. 90(1), pages 100-113.
    2. Havranek, Tomas & Irsova, Zuzana & Vlach, Tomas, 2016. "Publication Bias in Measuring the Income Elasticity of Water Demand," MPRA Paper 75247, University Library of Munich, Germany.
    3. Baerenklau, Kenneth A., 2015. "Theoretically consistent welfare estimation under block pricing: the case of water demand," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205723, Agricultural and Applied Economics Association.
    4. Henrique Monteiro, 2010. "Residential Water Demand in Portugal: checking for efficiency-based justifications for increasing block tariffs," Working Papers Series 1 ercwp0110, ISCTE-IUL, Business Research Unit (BRU-IUL).
    5. Tomas Havranek & Zuzana Irsova & Tomas Vlach, 2018. "Measuring the Income Elasticity of Water Demand: The Importance of Publication and Endogeneity Biases," Land Economics, University of Wisconsin Press, vol. 94(2), pages 259-283.
    6. Kenneth A. Baerenklau & María Pérez-Urdiales, 2019. "Can Allocation-Based Water Rates Promote Conservation and Increase Welfare? A California Case Study," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-26, April.
    7. Brandli Stitzel & Cynthia L. Rogers, 2022. "Residential Water Demand Under Increasing Block Rate Structure: Conservation Conundrum?," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 36(1), pages 203-218, January.
    8. Baerenklau, Kenneth A. & Schwabe, Kurt & Dinar, Ariel, 2014. "Do Increasing Block Rate Water Budgets Reduce Residential Water Demand? A Case Study in Southern California," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170019, Agricultural and Applied Economics Association.
    9. Wichman, Casey J., 2014. "Perceived price in residential water demand: Evidence from a natural experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PA), pages 308-323.
    10. Kenneth A. Baerenklau & Kurt A. Schwabe & Ariel Dinar, 2014. "The Residential Water Demand Effect of Increasing Block Rate Water Budgets," Land Economics, University of Wisconsin Press, vol. 90(4), pages 683-699.

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    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices

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