with Seema Jayachandran (Northwestern) and Sarojini Rao (UChicago)

The preferred policy solution to consumption externalities is corrective prices that reflect the social cost of consumption. However, for many externality-generating goods and services, such as water and electricity, prices are applied at the household level, allowing the externality problem to persist within the household: each individual enjoys the private benefits of consumption but shares the costs with other members of the household. The more efficient the household, the more individuals will internalize an increase in the price, leading to the prediction that more cooperative households will also be more price sensitive. We test this prediction with water use by households in Zambia, where we combine billing records, an exogenous price shock and experimental measures of intrahousehold cooperation. We find greater price sensitivity among more cooperative households: households with above-median measures of cooperation have a short-run price elasticity of -0.49; households with below median cooperation have an elasticity of -0.17. These results suggest that even Pigouvian pricing may not result in efficient consumption responses if inefficiencies exist within the household.