Working Paper No. 1402

Water Conservation and the Common Pool Problem: Can Pricing Address Free-Riding in Residential Hot Water Consumption?

Working Paper
Reference
Elinder, Mikael, Xiao Hu and Che-Yuan Liang (2021). “Water Conservation and the Common Pool Problem: Can Pricing Address Free-Riding in Residential Hot Water Consumption?”. IFN Working Paper No. 1402. Stockholm: Research Institute of Industrial Economics (IFN).

Authors
Mikael Elinder, Xiao Hu, Che-Yuan Liang

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.