Water price hikes and conservation
Agarwal, Araral, Fan, Qin and Zheng (2023) investigate the effects of price and subsidy increases on water conservation in Singapore and the welfare implications.
27 February 2023
Climate change portends dire consequences for access to potable water. Increasing global temperatures are throwing the water cycle off balance, causing more severe droughts, while floods and rising sea levels could lead to the contamination of fresh water by excess runoffs and salt water. Meanwhile, the global population is growing and projected to hit 9.7 billion people in 2050.
While a variety of policy tools – including water-saving technologies – have been deployed to support long-term water sustainability, water pricing, however, has yet to be integrated into the portfolio of measures by many regulators.
In their study “The Effects of Policy Announcement, Prices, and Subsidies on Water Consumption”, Agarwal, Araral, Fan, Qin and Zheng (2023) investigate the effects of price and subsidy increases on water conservation in Singapore and the welfare implications that arise.
As the price elasticity of demand for water is low – meaning that consumers tend to be indifferent to the cost of water due to ignorance and other reasons – there is much that can be done to raise this ratio. Findings in this study therefore have implications for how policymakers can draw consumers’ attention to water prices and the cost-savings arising from more prudent use of this resource.
Background
In February 2017, the Singapore government announced a 30% water price increase to be implemented in two stages in July 2017 and July 2018.
In Singapore, over 80% of the population lives in public housing (commonly known as HDB flats), while about 15% lives in private apartments. The average monthly household incomes for HDB residents ranged between S$2.5K and S$11.2K, depending on house size, while private home dwellers averaged out at a substantially higher S$21.8K.
Given such income heterogeneity, residents of different housing types may respond differently to an exogenous shock in water prices. Agarwal et al. deployed a difference-in-differences approach to analyse the effects of three shocks on water consumption, namely: (i) policy announcement (Feb 2017), (ii) first price increase (July 2017), and (iii) second price increase (July 2018).
HDB flats formed the treatment group, while private apartments served as the control group. The period from January 2015 to February 2017 served as the benchmark period, before any exogenous shock was implemented.
Findings
On the overall, for the period March 2017 to December 2018, the average water consumption for HDB flats, relative to private apartments, dropped by 5.8% following the announcement of price increase in February 2017. That effect was both statistically significant and economically nontrivial. Compared against average consumption during the benchmark period, a 5.8% reduction translates to nearly 10 litres of water saved per capita per day, which is equivalent to 56% of Singapore’s goal to reduce residential water consumption from 148 litres per capita per day in 2016 to 130 litres by 2030.
The researchers drilled down further to isolate the individual effects of policy announcement, and the subsequent two price increases. Regression analysis revealed that HDB households decreased water consumption by 3.7% more than private households for the period following announcement but before the first price increase (March 2017 to July 2017), and consumption further dropped by another 2.1% and 2.8% after the two-stage implementation of a 30% price increase respectively.
In contrast to HDB households, private residences appeared to be relatively indifferent to both policy announcement and the subsequent price hikes. Such a finding ties in with another study by Agarwal, Qian, Yeung and Zheng (2022) – "Taxing the rich to finance redistribution – evidence from a permanent tax increase in Singapore” – where the researchers found that the top earners in Singapore did not change their consumption patterns in spite of hikes in personal income tax.
The wealthy are characterised by a low marginal propensity to consume – which means that this group of people is not likely to adjust consumption behaviours in response to minor shocks relative to their overall disposable income.
As such, the increase in water prices has a potentially regressive distributional effect which results in lower income households cutting back on water consumption, while the more affluent segment of the population carries on with “business as usual”.
Indifference to utility subsidies
Utility subsidies are often implemented alongside price hikes to cushion the impact of higher costs. In tandem with the increase in water prices, the Singapore government also implemented an increase in utility subsidy to take effect in July 2017. The subsidy programme was structured to render more financial aid to lower income households.
While the programme would, in principle, address the regressive aspects of water price hikes, the researchers did not find any significant change in water consumption for HDB flats in response to subsidies.
Agarwal et al. conjecture that indifference to subsidies could arise from low public attention to the subsidy programme due to its design. Monies are automatically credited to utility accounts for eligible households, with no individual actions required. The lack of action significantly reduces the attention to the subsidy and the consumption responses.
Policy implications
Findings from this study suggest that current utility-subsidy programme design has not been entirely effective in addressing the regressive distributional effect of water price hikes. E-payments and automatic deduction of utility bills are becoming increasingly popular, which further reduce attention to cost savings.
On the other hand, the HDB household consumption response to policy announcement underscores the importance of information provision in altering price elasticity.
Authors:
Agarwal, Sumit is the Low Tuck Kwong Professor at the School of Business and Professor in the departments of Economics, Finance and Real Estate at the National University of Singapore.
Araral, Eduardo is an associate professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.
Fan, Mingxuan is a visiting assistant professor, Department of Real Estate, NUS Business School, National University of Singapore.
Qin, Yu is the Dean’s Chair and associate professor (with tenure) in the Department of Real Estate, NUS Business School, National University of Singapore.
Zheng, Huanhuan is an assistant professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.