Is Water Policy Limiting Residential Growth? Evidence from California

Abstract

Rapid population growth and increasing water costs have led western states to condition development on long-term water availability. Using original survey data, this paper examines the effects of water screening policies on California’s housing supply from 1994 to 2003. Panel regressions indicate that these policies significantly slowed housing growth. However, impact fees based on the costs of residential water connections do not have this effect and may constitute a preferred policy. To enhance the social efficiency of screening policies, regulators should encourage the adoption of conservation-oriented water rates, which are associated with significant savings in residential water use. (JEL Q25, R31)