The Effect of the water tariff structures on the water consumption in Mallorcan hotels

Abstract

Tourism increases water demand, especially in coastal areas and on islands, and can also cause water shortages during the dry season and the degradation of the water supply. The aim of this study is to evaluate the impact of water price structures on hotel water consumption on the island of Mallorca (Spain). All tourist municipalities on the island use different pricing structures, such as flat or block rates, and different tariffs. This exogenous variation is used to evaluate the effect of prices on water consumption for a sample of 134 hotels. The discontinuity of the water tariff structure and the fixed rate, which depends on the number of hotel beds, generate endogeneity problems. We propose an econometric model, an instrumental variable quantile regression for within artificial blocks transformed data, to solve both problems. The coefficients corresponding to the price variables are not found to be significantly different from zero. The sign of the effect is negative, but the magnitude is negligible: a 1% increase in all prices would reduce consumption by an average of only 0.024%. This result is probably due to the small share of water costs with respect to the total hotel operational costs (around 4%). Our regression model concludes that the introduction of water-saving initiatives constitutes an effective way to reduce consumption.