Title

Environmental Externalities and Free-Riding in the Household

Author(s)

B. Kelsey Jack B. Jack (University of California)

Seema Jayachandran Seema Jayachandran (Princeton University)

Flavio Malagutti Flavio Malagutti (University of California)

Sarojini Rao Sarojini Rao (Virginia Department of Planning and Budget)

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.

Creation Date

2023-08

Section URL ID

Paper Number

2023-13

URL

https://seemajayachandran.com/enviro_intrahh.pdf

File Function

Jel

D10, H21, H23, O10, Q56

Keyword(s)

environmental externalities, intrahousehold decision-making, moral hazard, Pigouvian pricing, water use

Suppress

false

Series

13