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should consider making use of pricing studies in those cases where information problems prevent concrete recommendations at the project appraisal stage.

59. Difficulties in forecasting demand have arisen primarily in the utility and transport sectors. The problems in power, water and natural gas stem mainly from the difficulty of estimating the consumption of new customers; **average** per capita consumption tends to fall as service is extended into poorer areas of the city. In addition, in the pover sector demand was badly overestimated in many countries during the 1970s due to the failure to recognize the major price and income effects of higher oil prices. Demand estimation has also been poor in the transport sectors. In railroads, the 1981 sectoral review showed that freight volume growth had been consistently overestimated, vith 30-40% shortfalls by the second or third year after appraisal in some cases. Xeanwhile, passenger traffic exceeded forecasts in t' ee quarters of the **cses.** (Because of the widespread subsidizatio. of passenger traffic, this often increased losses). Pc t traffic projections must consider competition from neighboring %untries, the effect of shipping cartels, and **the** bouya ncy of export markets, as well **as** domestic intermodal choice. Thus, while some of the problems of transport demand estimation could be alleviated by taking **a** full sectoral approach (i.e , considering roads, rails and ports together), the difficulties will remain substantial.

60. In the housing sector there has been considerable recent research into the determinants of housing demand by income class .1/ The traditional method of demand estimation was to use a rule of thumb that households would be willing to pay 20-25* of their income for shelter. More sophisticated analyses show a range of 5%-400, depending on income level ard stage of development. In addition, empirical research has shown the importance of including "unearned" income, such as transfers, in such calculations. Efficiency prices for housing must reflect the full value of land and mortgage capital; these typically exceed the willingness to pay of low-income target beneficiaries. Thus the pricing implications of this research are that either lower cost design standards or higher subsidies will be necessary to reach the target population.

61. Regardless of the quality and quantity of studies on the determinants of demand and the degree of price responsiveness, uncertainties will remain. These should be dealt with through the strategy of implementing the recoAmended price. Once the studies and estimations have produced a price target, if it is a major step from current prices, the government has two choices. If the final target is fairly clear (such as an import equivalent price for a petroleum product), it is often best to move in a single large leap, thereby fulfilling expectations, reducing uncertainty and reaping the political costs only once. If the target itself is uncertain, it may be better to approach it gradually, monitoring the demanoi response along the way, and making mid-course corrections if the original assumptions about price elasticities are not borne out by experience.

# Externalities

62. In the health, education, water and telecommunication **s** ectors the gain that accrues to society from incremental consumption is likely to be larger than that accruing to the individual consumer. Vaccination