The Limits of Water Pricing in a Developing Country Metropolis: Empirical Lessons from an Industrial City of Pakistan

This paper seeks to question the effectiveness of water pricing as a means of consumer behavioural change in urban centres of the Global South by analysing the domestic usage for water in a major industrial city of Pakistan. Using survey data of 1100 households from Faisalabad city, we estimate the price and income elasticities of water demand. Instrumental variable methods are applied to overcome the endogeneity issues of water pricing. The findings reflect that price and income elasticities vary across different groups. Price elasticities range from -0.43 to -0.71, and income elasticities vary between 0.01 and 0.12. These findings suggest that pricing policies may have limited scope to drive households' water consumption patterns. However, these empirics may suggest that policy makers should design an appropriate tariff structure to increase revenues that can be invested to further improve the existing water infrastructure. The study findings also suggest that non-pricing instruments, such as water saving campaigns, may be helpful in driving an efficient use of water in rapidly growing cities in the developing world.