Econometrica: Sep 2015, Volume 83, Issue 5

The Value of Free Water: Analyzing South Africa's Free Basic Water Policy

https://doi.org/10.3982/ECTA11917
p. 1913-1961

Andrea Szabó

This paper analyzes South Africa's Free Basic Water Policy, under which households receive a free water allowance equal to the World Health Organization's recommended minimum. I estimate residential water demand, evaluate the welfare effects of free water, and provide optimal price schedules derived from a social planner's problem. I use a data set of monthly metered billing data for 60,000 households for 2002–2009 from a particularly disadvantaged suburb of Pretoria, with rich price variation across 20 different nonlinear tariff schedules. I find that the free allowance acts as a lump‐sum subsidy, without large effects on water consumption. However, it is possible to reallocate the current subsidy to form an optimal tariff without a free allowance, which would increase welfare while leaving the water provider's profit unchanged. This optimal tariff would also reduce the number of households consuming low quantities of water, a desirable policy goal according to the WHO.



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Supplement to "The Value of Free Water: Analyzing South Africa’s Free Basic Water Policy"

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