most efficient way to determine the price elasticity of projectcanbedividedintotwoparts:onepartreplacesthe water demand. Based on econometric studies, the short- previous sources and quantity of water use, the other part and medium-run price elasticity of w'ater demand is is a 'iet _gncrease_ in water consumption. In this context, usually in the -0.2 to -0.8 range.' Price elasticity changes benefit of the first part is equal to the savings of economic ns one moves along the demand curve. Arc elasticity over costs of consumers who do not need to use t:.e former the assumed range of price change is more relevant for watersourcesanylonger(thearearepresentedbyOQlDlPI economic analysis than point elasticity. If known, the in Graph 1). Benefit of the second part is equal to the area effects of previous tariff increases can be analyzed to below the demand curve between the with-project and select a particularvalue for the price elasticity.' After the without-project water use of each consumer (the area price effect is taken into account, the same test as above QlQ2D2D1 in Graph 1). can be carried out to see whether the project is justified.

Before beneflits can be estimated, a survey of These demand projections assume that the ob- existing water consumption patterns must be undertaken served quantity of piped water consumption with the to determine the quantity of water used from each source corresponding price providesa point on the demrand curve. If supply is intermittent or consumption is not metered and a flat monthly fee is charged, that assumption will be 2$ For example, Al-Qunaibet and Johnston (1985). unfounded. Also, if the number of existing customers is 26 If these effects are not documented, one could, as a last small compared to the planned expansion, extrapolation resort, rely on Martin and Thomas (1986), who found that of observed piped water consumption patterns Is highly the long-run price elasticity for residential water was uncertain. about -0.5 over a wide range of price changes and across several countries. With respect to industrial water deWhen the FIRR is below the opportunity cost of mand, Renzetti (1988) found that the price elasticity was capital, the "shortcut" method cannot be applied. Adding in the -0.1 to -0.6 range, with the demand of water consumer surplus to the revenues might raise the calcu- intensive industries being generally more elastic. lated internal rate of return; however, _the consumer_ I The without project consumption of these customers _surplus of new customers cannot be estimated without_ would be zero unless nonpiped water use is also taken into _taking into account their existing, nonpiped water con-_ account.

_sumption.27_ The indirect method described below can be I Whether this actually happens depends on the quality applied in all these cases as wellaswhensa completely new and price of piped water compared to water from other system is to be constructed. sources.

_Indirect method._ Residential consumers use water for drinking,cooking,bathing,washing, and so forth. The water quality required depends on the purposeor use. Brackish watermight be acceptable for washing but not for drinking. When piped water is not available, people usually rely on a variety of water sources: vendors, wells, rivers, ponds, springs, rainwater. Both the quality and the price of water from these sources are different, and each water source serves different needs. Whet; piped water becomes available, it is a potential substitute for water from all other sources.28 The incremental quantity of piped water supplied by a <!-- Start of picture text --> Graph 1: Benefit of Piped Water<br>maWgifnWi<br>Dl<br>P1iD<br>I<br>- - - -<br>- - ,<br>\ mn<br>curve<br>GI 02 quantwI<br>a1 Waow UNoutproJea<br>02 Wate use WMU am projeof<br>P1 Marghd cosOko of watV without prole<br>P2 MagI9 ooaVpro d waWer wt do pro<br><!-- End of picture text --> 9