The Impact of Residential Water Price Increases and Subsidy Reductions on Elasticity of Demand in Abu Dhabi City

Abstract

The purpose of this study is to determine price elasticity of demand (PED) for residential water. Price elasticity of demand measures the responsiveness of household water demand to increases in the price of water, which is desalinated at great expense, but subsidized to consumers by the United Arab Emirates (UAE) government. The price of water is the main tool in water demand management, and consequently, manages the sustainable supply of the water resource. This is a short-term study that compares the change in consumption in 2015 against 2014 (full-year comparisons), among Abu Dhabi national and non-national residents, who are charged different marginal rates for household water. Importantly, 2015 marked the first year that Emirati residents paid for water, while the water price for non-national households has been unchanged almost 20 years, since 1997. The primary question that this research asks is: To what degree did the 2015 restructured water price increases impact the consumption choices of national and non-national households in Abu Dhabi?

I employed a blocked design to compare a representative sample of over 45,500 national and non-national households across the municipalities of Abu Dhabi and Al Ain. I also conducted a review of existing literature on residential water demand price elasticity in the Arabian Gulf, a review of the regional practice of subsidizing the cost of water, and the existing desalination processes in the UAE for their associated environmental impacts. The results show that the median marginal price elasticity of demand was relatively inelastic at -0.23 for nationals and less than the median of non-nationals at -0.33. The marginal price elasticity was determined to range between -0.12 to -0.42 overall. Price elasticity was relatively less elastic in national households because the percent change in price remained far from recovering the cost of supply. This study introduced a new variable to calculate the impact of the government subsidy on demand elasticity. By calculating the area between the low price curve of water demand and the high cost curve of production, I have arrived at a new measure for demand elasticity, that takes the government subsidy into account. Contrary to the price elasticity results, the combined price and subsidy elasticity measures show that the national segment has exhibited greater elasticity at a median of -1.68, which is relatively elastic, compared to the non-national median at -0.41, which is relatively inelastic. The results reflect the extent to which household water has remained relatively elastic and devalued among the nationals segment. The results of this study are useful for researchers who seek to forecast the immediate short term impacts in demand elasticity in regions where consumption behavior has been ingrained and difficult to change.