An Estimation of Residential Water Demand Using Co-Integration and Error Correction Techniques

Abstract

In this paper short- and long-run price elasticities of residential water demand are estimated using co-integration and error-correction methods. Unit root tests reveal that water use series and series of other variables affecting use are non-stationary. However, a long-run co-integrating relationship is found in the water demand model, which makes it possible to obtain a partial correction term and to estimate an error correction model. Using monthly time-series observations from Seville, Spain, we find that the price-elasticity of demand is estimated as around -0.1 in the short run and -0.5 in the long run. These results are robust to the use of different specifications.

JEL classification codes:

• C22
• D12
• Q25

Key words:

• seasonal unit roots
• residential water demand
• price elasticity
• co-integration
• error correction