RT Journal Article
SR Electronic
T1 Reconsidering the Economics of Demand Analysis with Kinked Budget Constraints
JF Land Economics
JO Land Econ
FD University of Wisconsin Press
SP 173
OP 190
DO 10.3368/le.86.1.173
VO 86
IS 1
A1 Aaron Strong
A1 V. Kerry Smith
YR 2010
UL http://le.uwpress.org/content/86/1/173.abstract
AB This paper has two objectives. First, we identify a problem with the ability of the discrete-continuous choice framework and conditional demand functions to fully describe consumer preferences in the presence of kinked budget constraints. Second, we propose and illustrate an alternative, preference-based method for estimating consumer responses to price changes under these conditions. This framework recognizes that commitments to commodities such as pools or outdoor landscaping influence how water consumption responds to price changes as part of the long-run consumption adjustments. With microdata on household choices, this approach could be used to design increasing block rate structures that recognize the differences in water consumption responses with these commitments. (JEL Q25)