Abstract

When consumption generates negative externalities, the preferred policy solution is to set a price that reflects the social cost of consumption. In some cases – for example, household water and electricity use – consumption is susceptible to a second externality problem: each individual enjoys the private benefits of consumption but shares the costs with other household members, leading to overconsumption even from the household's viewpoint. We test the prediction that intrahousehold inefficiency dampens price sensitivity in the context of water use in Zambia, combining billing records, randomized price variation, and lab-experimental measures of intrahousehold efficiency. We find that households with above-median measures of intrahousehold efficiency have a short-run price elasticity of -0.49, while those with below-median efficiency have an elasticity of -0.17. These results suggest that the required Pigouvian price when usage is billed at the household level, yet own and other household members' consumption is difficult to observe, will need to be set to correct both the environmental and the intrahousehold externalities. Alternative policies such as price incentives targeted toward the primary water-using household members or access to real-time data on household water consumption (which would improve the enforceability of intrahousehold agreements) could also be useful.