| The way consumers react to block pricing has important welfare implications for many economic policies. Standard economic theory assumes that households optimize with marginal price, yet there is no clear empirical evidence as to what water price they actually respond. If households are not responding to marginal price, increasing block rates for water may not be cost-effective or even successful at achieving its policy goals of conservation and equity. Using a detailed household- level panel dataset for 16,277 residential customers in Southern California, I shed light on complex pricing schedules and answer several questions about water consumption behavior.;I begin by examining a household's perceived price of water, where I am able to exploit price variation from several rate increases and a rate structure change from increasing block rates to "water budgets"---water budgets use block sizes that are determined by household and environmental factors. I find strong evidence that consumers respond to different alternative prices, rather than marginal price, depending on which block structure they face. I also find that the average consumer is able to predict their consumption with a standard error of 27%. Improvements in price signals and information provision may limit this type of suboptimizing behavior and uncertainty.;Water suppliers also use mandatory water restrictions to induce conservation, and I find that they reduced overall consumption by 5%---this effect was stronger for those with larger lawns. Lastly, I compare reduced-form and structural methods for estimating price elasticities of demand. As consumption and price are inextricably linked, I conclude that the method of instrumental variables may be fundamentally inappropriate for demand estimation under block rates. Covering many facets of water pricing and consumption behavior, this paper provides useful information to suppliers deciding how to balance their budgets, induce conservation, and provide reliable supply. |
