Managing water supply shortage: Interruption vs. pricing

Supply shortage is a common problem faced by a consumer. Solutions for allocating the limited supply include rationing, queuing, interruption and pricing. While previous research has examined the welfare losses generated by each solution, there is little evidence on their relative magnitudes within a common framework. The objective of this paper is tospecify a model of consumer behaviour under service interruption to estimate the exact welfare loss of service interruption. The same model is used to estimate the loss of a price increase intended to resolve a supply shortage. Using water consumption data collected for Hong Kong, we find that relative to pricing, service interruption is inefficient for water shortage management. Copyright © 1994 Published by Elsevier B.V.