A Discrete/Continuous Choice Approach to Residential Water Demand under Block Rate Pricing: Reply

Waldman is quite correct in noting that the microeconomic theory of block rate pricing in Hewitt and Hanemann (HH 1995) is given for the general case of a K-block rate structure, whereas the econometric theory is largely confined to the case of exactly two blocks. The extension in Waldman to the more general case of K blocks is correct, although the extension itself could be even more general, if it addressed the nonnegativity of demand, as is demonstrated below. That no apparent attention was paid to the nonnegativity of demand in HH may be attributed to the fact that the need to do so was negated by a fortuitous assumption in the earlier work. Although that assumption-that the errors are multiplicative and lognormally distributed-was only maintained and not tested in HH, I now estimate two models with the more common assumptions of linear demand and additive and normally distributed errors, both with and without a modification for