Threshold Effect in Residential Water Demand: Evidence from Smooth Transition Models

This paper aims to empirically examine the presence of nonlinear behavior in residential water demand for the case of Tunisia. We specifically explore the existence of nonlinearity with respect to the magnitude of water price changes through a logistic smooth transition regression (LSTR) framework and an increasing multi-step water pricing scheme. Using quarterly time series for the period 1980-2007 which describes residential water consumption and its main determinants, our results provide strong evidence that water consumption responds nonlinearly to the extent of price changes for the two consumption blocks considered. Water price elasticities are found to be higher when variation in tariffs surpasses a given threshold. More precisely, we find a unit elastic water demand for lower block consumers (low-income households) when price changes exceed a threshold of roughly 5%. For the upper block consumers (high-income households), water consumption is less elastic in comparison to low-income households, but still significant when the price variation exceeds a threshold of 2.6%. Our findings imply that increasing the length of the lower block of consumption may help achieve goals of social equity, while increasing tariff progressivity, at least for upper block consumers, helps promote water saving.