Economic parameters of water demand management for domestic use in urban China[II]

8. THE DEMAND EQUATION

International experience has shown that water demand is a function of price when household incomes and other variables that influence price are constant. As price increases, the quantity demanded at the given price will decrease, consumers will adjust themselves customary for water consumption depends on the signal of price. The demand curve slope goes downward to the right because consumers are ready to consume more water if the price is lower. As noted previously, price elasticity of demand can be expressed by the formula:

That is,

And also, the any point elasticities in the curve

Then

P = P1
So, the equation of demand can be expressed as:

An urban water demand model has been developed based on this equation of demand. It can show willingness-to-pay for an amount consumed and provides a demand curve after modification for loss of water supply. Assuming the average tariff of domestic could be increased to 0.90 yuan/m3 in 1998 and by 10 percent annual increments in next eight years, 15 percent of loss of water supply considered, 4 percent annual increment in household incomes, 3 percent annual inflation, 2 percent of population served increment. Thus, total demand for domestic would not exceed 1997 levels until the year 2004. The demand curves for different households vs. years are shown at Figure. 3, 4.

Figure 3 Demand Curve 1997

Figure 4 Demand Curve for Domestic Use

Table 4 Projected Water Demand for Domestic

The findings indicated water demand for domestic use would not exceed 1997 levels until the year 2000 if water demand is managed well. If the population served increases to 289 million by the year 2007, that is, a 30 percent increase from 1997, domestic water supply will only rise 330 million m3, or 32 percent from 1997 and the tariff in the same period will rise by 167 percent; the tariff expenditure on the household income is still less than 1 percent even though it rises 1.83 times calculated with comparable 1997 prices. In comparison with international experience, the adjusted tariff expenditures on income are still at a low level. To ensure the financial sustainability of the water supply industry and promote the economically efficient use of water, the pricing strategy must provide appropriate price signals to consumers to promote the efficient use of water and conservation practices, but that is affordable for consumers in practice.

Economic parameters of water demand management for domestic use in urban China[III]