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Environmental Economics

The Global 2000 Report to the President: Entering the by Gerald O. Barney

By Gerald O. Barney

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Extra resources for The Global 2000 Report to the President: Entering the Twenty-First Century

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Chapter 4 COMMERCIAL AND INDUSTRIAL WATER DEMANDS 1. INTRODUCTION This chapter examines the structure of commercial and industrial water demands. It begins with a brief theoretical treatment of production theory. This section is used to learn what direction is provided by economic theory for the construction of input demand models, to identify the variables that can be expected to influence firms' water demands, and to clarify the types of data needed to estimate the structure of firms' water demands econometrically.

Grebenstein and Field (1979) is the first econometric study to do this. S. manufacturing industry. Two separate prices are used for water: the first is compiled by the American Waterworks Association and represents the average of industrial water prices in each state and the second is from Montanari and Mattern (1975). One limitation related to the first of these price series is that they appear to be based on the prices charged by municipal utilities to industrial water users while most water use by industries in the sample is self-supplied.

These types of results lead Howe (1982) to conclude "The exact interpretation of D, however, and the rationale for the magnitude of its estimated coefficient remain something of a mystery" (p. 716). An alternative to estimating residential water demands using the TaylorNordin price specification and OLS is to adopt an estimation procedure that specifically addresses the endogeneity of the price variable. This can be done by creating an instrumental variable to serve as a proxy for price or by using a two-stage estimation procedure in which price and quantity are simultaneously determined.

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