Environmental Externalities and Free-Riding in the Household

B. Jack, Seema Jayachandran, Flavio Malagutti and Sarojini Rao
Additional contact information
B. Jack: University of California
Flavio Malagutti: University of California
Sarojini Rao: Virginia Department of Planning and Budget

Working Papers from Princeton University. Economics Department.

Abstract: In addition to generating a negative environmental externality, a household’s water consumption entails another “market failure†: household members free-ride off each other and overconsume. The problem stems from consumption being billed at the household level and the difficulty of monitoring one another’s consumption. We document the importance of this phenomenon in urban Zambia by combining utility billing records and randomized person-specific price variation. We derive and empirically confirm the following prediction: Individuals with weaker incentives to conserve under the household’s financial arrangements reduce water use more when their person-specific price increases. Another prediction is that this overconsumption problem is more acute when the financial benefit of a lower utility bill is shared unevenly among household members. We show that households indeed seem more responsive to a change in the household-level price of water when their financial arrangements are more equal. Our results offer a novel explanation for the low price sensitivity of residential water (and electricity) consumption.

Keywords: environmental externalities; intrahousehold decision-making; moral hazard; Pigouvian pricing; water use (search for similar items in EconPapers)
JEL-codes: D10 H21 H23 O10 Q56 (search for similar items in EconPapers)
Date: 2023-08
New Economics Papers: this item is included in nep-agr, nep-env, nep-reg and nep-res
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Downloads: (external link)
https://seemajayachandran.com/enviro_intrahh.pdf

Related works:
Journal Article: Environmental externalities and free-riding in the household (2024)
Working Paper: Environmental externalities and free-riding in the household (2018)
Working Paper: Environmental Externalities and Free-riding in the Household (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2023-13

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