Estimating Residential Water Demand using the Stone-Geary Functional Form: the Case of Sri Lanka*

This paper formulates a demand model for residential water in Sri Lanka using the Stone-Geary functional form. This functional form has two main advantages when compared with Cobb-Douglas: non-constant price elasticities and; it considers water consumption as two components – a fixed and a residual. These two components allow us to estimate the threshold below which water consumption is non-responsive to price changes. Our findings show that the portion of water use insensitive to price changes in Sri Lanka is between 0.64 and 1.06 per capita per month. This is below estimates for developed countries indicating that reducing water consumption via price instruments may be more successful in developing countries. Price elasticity ranges from -0.11 to -0.14 and the income elasticity varies from 0.11 to 0.14. These estimates are similar to those for developed countries suggesting policy makers should not rely solely on price instruments to reduce water consumption.