The Value of Free Water: Analyzing South Africa's Free Basic Water Policy
This paper analyzes South Africa’s Free Basic Water Policy, under which households receive a free water allowance equal to the World Health Organization’s recommended minimum of 6 kiloliters per month. I structurally estimate residential water demand, evaluate the welfare effects of free water, and provide optimal price schedules derived from a social planner’s problem. I use a unique dataset of monthly metered billing data for 60,000 households for 2002-2010 from a particularly disadvantaged suburb of Pretoria. The dataset contains rich price variation across 18 different nonlinear tariff schedules, and includes a policy experiment which removed the free allowance. I find that without government subsidy, the mean monthly consumption would decrease from 12.6 to 5.6 kiloliters, which is below the clean water consumption recommended by the WHO. However, it is possible to reallocate the current subsidy to form an optimal tariff without a free allowance, which would increase welfare while leaving the water provider’s revenue unchanged. This optimal tariff would also reduce the number of households consuming below the WHO-recommended level.
This paper was presented at the Financial Systems, Industrial Organization, and Economic Development Workshop in April of 2012. The corresponding presentation is also available.