Determinants of water demand in marginalized urban areas in Lima-Peru and their importance in improving social welfare

Abstract

This research studies part of the water market from marginalized urban areas in Lima-Peru, where households are not provided potable water service with pipes by the Lima water company. Given this, consumers of marginalized areas pay higher prices from tank trucks services than consumers of the Lima water company. Therefore, the main purposes of this study are: (1) to identify the determinants of water demand using an instrumental variable regression, and (2) to know how social welfare changes when water price varies. For measuring this change, I use concepts such as consumer surplus, producer surplus, equivalent variation and compensating variation. I use data from the survey conducted by the Direct Marketing Research and Consulting, and the National Superintendence of Sanitation Services of Peru (SUNASS). Finally, the results suggest that consumption of water depends significantly on water price, number of people per household, the storage capacity of water that each household has and the level of income. Likewise, we found out that there is a strong negative relation between water price and social welfare; thus, public policies to regulate the level of water price are strongly recommended.