Derived Willingness-to-Pay for Household Water Use with Price and Probabilistic Supply

Abstract

Stochastic optimization is used to estimate the willingness-to-pay (WTP) of individual households and groups of households for changes in a combination of probabilistic water supply reliability and retail price of water. By modeling the financial and “perceived” costs of implementing long- and short-term conservation options and assuming rational (expected value cost minimizing) behavior, economic demand curves for water and expected water use can be estimated for a household. Monte Carlo-simulation techniques are used to represent variability in the household model parameters and derive estimates of aggregate household WTP for water supply reliability, and demand curves for water and conservation measures. Examples are provided to illustrate the approach.