Household demand and welfare: implications of water pricing in Cyprus

This paper considers a model of household demand for water in a theoretical framework consistent with funtamendal principles of comsumer behaviour. It applies this model to individual household data to estimate the price and income elasticities of residential demand for water in Cyprus and evaluate the welfare effects associated with changes in the water pricing system. We &nd that the current regionally heterogeneous increasing block pricing system in the island introduces gross price distortions that are not justi&ed either on efficiency or equity grounds. A shift towards uniform marginal cost pricing will eliminate the deadweight loss of the current system. However, its bene&ts will be distributed in favour of the better off households. Overall, price can be an effective tool for residential water demand management, however, it may also lead to socially undesirable distributional effects on households.