Derived Willingness-To-Pay For Water: Effects Of Probabilistic Rationing And Price

A two stage linear programming approach is used to estimate the willingness to pay (WTP) of individual households or groups of households for changes in a combination of probabilistic water supply reliability and retail price of water. By modeling the costs (financial and ‘perceived’) of implementing long and short-term conservation measures and assuming rational (expected value cost minimizing behavior), demand curves for water and expected water use curves can be estimated. Derived demand curves for conservation measures can also be calculated. Next Monte Carlo simulation techniques are used to represent household variability in the model parameters and derive estimates of aggregate WTP for water supply reliability, water demand curves and demand curves for conservation measures. Several examples are provided to illustrate the approach.