The demand for water: Some empirical evidence on consumers' Response to a commodity uncertain in supply

Abstract

Based on a theoretical model that studies how individuals respond to a commodity uncertain in supply, this paper estimates some demand functions for water in situations where supplies are known to be stochastic. The model is applied to data consisting of a sample of Massachusetts towns, separate functions being estimated for household and industrial demand. Two cross sections are estimated, one for 1962 and one for 1965, the beginning and the end, respectively, of the New England drought. As far as household demand is concerned, price, uncertainty as measured by supply variance, and particularly housing space are significant, whereas for industrial demand only the first two variables are significant. The results also indicate that firms are more responsive than households to both price and uncertainty and that their response to uncertainty lessened as a result of the drought, an implication that agrees with the theoretical model.