Watering households: The two-error discrete-continuous choice model of residential water demand

tudies of the impacts of pricing policies and conservation programs for residential water service are important to determine the relevance and importance of these two broad types of policies which water utilities use to ensure reliable and equitable water service. Increasing block rate pricing has been instituted by some water utilities that are facing an increasing marginal cost of delivery, as a means of recovering costs while simultaneously providing incentives for continued water conservation. The literature on water demand has addressed demand under block rate pricing, but chiefly as an econometric problem, that is, using simultaneous equations estimation in response to the noted endogeneity of price under block rate pricing.;This dissertation takes an alternative view of demand, resulting from the solution to a discrete/continuous choice problem. The formal model describes the consumer choice of where within a block range to consume (the continuous choice) and in which block to consume (the discrete choice). The implications for estimation and prediction of this model via regression analysis are discussed. A two error model, including heterogeneous preferences and perception as sources of error, is argued to be identifiable and superior to a single error model. The maximum likelihood approach to the model is carefully presented, including several options for distributional assumptions and the restrictions necessary according to theory. How sociodemographic variates can influence the decision process without affecting the economic theory is also carefully presented.;The maximum likelihood method is then applied to a household level dataset of households in Denton, Texas to estimate the demand for residential water services. The main results using a constant elasticity functional form assumption produce a price elasticity of...