This paper examines the problem of simultaneous‐equations bias in estimation of the water demand function under an increasing block rate structure. The Hausman specification test is used to detect the presence of simultaneous‐equations bias arising from correlation of the price measures with the regression error term in the results of a previously published study of water demand in Tucson, Arizona. An alternative simultaneous equation model is proposed for estimating the elasticity of demand in the presence of block rate pricing structures and availability of service charges. This model is used to reestimate the price and rate premium elasticities of demand in Tucson, Arizona for both the usual long‐run static model and for a simple short‐run demand model. The results from these simultaneous equation models are consistent with a priori expectations and are unbiased.
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Agthe et al. (1986) studied this question.
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