Estimating Demand for Intake Water by Self‐Supplied Firms

The proper specification of the price variable in estimating the demand for intake water by self‐supplied firms is a neglected subject in the literature. Previous studies have used measures of average cost, but neoclassical economic theory suggests firms respond to marginal costs. Using data from a sample of paper and chemical firms in Arkansas, the null hypothesis that there is no significant difference in the estimates of industrial water demand using either average or marginal costs is tested. It is shown that the use of average cost provides a better estimate of water use in terms of statistical fit and predictive capabilities.