The way consumers react to block pricing has important welfare implications for many economic policies. Standard economic theory assumes that households optimize with marginal price, yet there is no clear empirical evidence as to what water price they actually respond. If households are not responding to marginal price, increasing block rates for water may not be cost-effective or even successful at achieving its policy goals of conservation and equity. Using a detailed household- level panel dataset for 16,277 residential customers in Southern California, I shed light on complex pricing schedules and answer several questions about water consumption behavior.I begin by examining a household’s perceived price of water, where I exploit price variation from several rate increases and a rate structure change from increasing block rates to "water budgets"—water budgets use block sizes that are determined by household characteristics and environmental factors. I find strong evidence that consumers respond to different alternative prices, rather than marginal price, depending on which block structure they face. I also find that the aver- age consumer is able to predict their consumption with a standard error of approximately 27%.Water suppliers also use command-and-control policies to induce conservation, and I examine the impact of mandatory outdoor restrictions. I find that they reduced overall consumption by 5% and that the effect was stronger for those with larger lawns. Lastly, I compare reduced-form and structural methods for estimating price elasticities of demand. As consumption and price are in- extricably connected, I conclude that the method of instrumental variables may be fundamentally inappropriate for demand estimation under block rates. This paper addresses several topics regard- ing water pricing and consumer behavior and provides useful information to water suppliers who are deciding how to balance their budgets, induce conservation, and provide reliable supply.
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