Cape Economics SBA

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Acknowledgements
First of all, I would like to thank God for giving me the life and good health needed to
carry out this dissertation.
I would also like to thank my teacher Mrs. Ermay for giving me well informed guidance
in putting together this SBA.
Moreover I am very grateful to the staff of WASCO for providing me with the necessary
information. In particular, I would like to thank the Finance Manager, Mr. Martial, who assisted
me throughout this project. Even though he was busy with work obligations, he constantly
accommodated me, answering my questions whether it be in person or via e-mail.
Finally, I would like to thank my parents, for providing me with the resources needed to
complete this SBA. My father especially deserves tremendous thanks as his position on the
board of WASCO not only enabled him to advise me on the topic but also to get in contact with
the organization. More importantly, it was he who suggested the research topic to me.

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WASCO Company Profile
Market Structure: State Monopoly
Barriers to Entry: Startup costs are extremely high due to the cost of expensive
infrastructure needed to deliver water. Furthermore, one must first
obtain an abstraction license (to extract water from the earth) and an
operating license (to legally sell water to consumers). WASCO is the only
entity in possession of these licenses.
Control over Price: WASCO has control over price, but only to a certain extent. Before any
price change can be implemented, WASCO first has to submit a proposal
to the National Water & Sewage Commission (NWSC) who has ultimate
authority to approve, amend or decline the proposal.
Nature of Good: WASCO provides water for consumption and water services for waste
(sewage water).
Number of Buyers: There are approximately 50,000 customers who consume water services
from WASCO. They are classified into the following categories;
 Domestic
 Commercial
 Government
 Hotels
 Boats

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Introduction
In September 2012, the St. Lucia Water & Sewage Company (WASCO) proposed an increase
in tariff rates on water consumption of 90%. WASCO cited several reasons for their submission
as follows:
 The existing tariff did not allow it to meet its obligations
 The existing tariff was implemented since 2000
 The costs of energy had increased significantly from 2000
 To help cover the costs of repairing the extensive damage caused by Hurricane Tomas
and the drought of 2009/2010
The National Water & Sewage Commission (NWSC) invited the public to comment on the
proposed tariff increase for water for a period of two weeks.
In a meeting organized by the National Consumer Association (NCA) in the town hall, there
was a clear consensus for supporting an increase in the water tariff. Persons argued that an
increase in the water rate was necessary, so that the company can undertake the necessary
improvement to the water network by replacing damaged and outdated water mains.
Meanwhile, some members of the St. Lucia Hotel and Tourism Association (SLHTA) who
attended a meeting held at Bay Gardens Hotel believed that the proposed tariff was too high.
They suggested that consideration should be given to phasing the rate over a three year period
and that such phasing should be done against marked improvements in the service delivery.
They believed that this would be an incentive for WASCO to generate internal efficiency.
A number of private individuals submitted comments to the Commission on the proposed
tariff. Whilst most persons understood the need for the increase in tariff, most believe that
WASCO should shoulder some of the responsibility for the poor service delivery, poor water
quality and the lack of consistent water supply.
After due consideration of the comments made during public consultation, the NWSC
decided on an increase in water rates of 66.15%. 10.43% was to be allocated for the dredging of

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the John Compton Dam which suffered massive siltation during Hurricane Tomas and the
remaining 55.72% was to go to WASCO.

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Aims
1. To analyze the effect on water consumption of various sectors due to the change in
tariff.
2. To estimate the price elasticity of demand (PED) of water.
3. To investigate the factors affecting the PED of water.
4. To predict the long term effect of the change in tariff on water consumption.

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Sources of Data
1. Documentary Research
Documentary research is the use of outside sources or documents to support the
viewpoint or argument of an academic work.
The main advantage is that it is quicker than data collection methods which
require you to collect your own data. However, its main drawback is that it is very
subjective as different researchers may express different opinions on the topic.
Documents may also lack reliability and researchers may forge their results.
The documents used to collect the data included:
 Company Records of Monthly Consumption and Revenue
 Newspapers
Permission had to be obtained from the company in order to gain access to its
records. This permission was obtained from the Finance Manager, Mr. Darnell Martial.
2. Interview
This is where the investigator directly contacts informants, solicits their co-
operation and collects the data.
Two key advantages of the direct interview is that it ensures a high response rate
and the researcher can explain questions which respondents have doubts about.
Two disadvantages however are that it is quite time-consuming and respondents
may not always be available for the interview.
Several interviews were conducted with the Finance Manager, Mr. Martial.
These interviews were not structured; they were formal and informal meetings where

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he explained to me whatever I needed to understand. Nevertheless, they have been
converted to a structured format in the appendix (pgs 48 – 52).
3. Questionnaire
This is a document prepared by the investigator containing a set of questions
relating to the problem of enquiry.
The main advantage of a questionnaire is that it is time efficient – a large
number can be distributed in a short time.
However its main disadvantages are that response rates may be low and the
researcher cannot explain questions to those who have doubts.
The original objective of the questionnaire was to investigate why the elasticity
varied for the different sub-sectors. However, after realizing that the sample size
required for this would be too large, the new objective of the questionnaire simply
aimed to investigate why the demand for water on a whole was inelastic.

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Procedures for Questionnaire
Sampling
A total of 30 respondents was chosen as the sample size. In order to get a sample as
representative of the population as possible, stratified sampling was used. This is where the
population is divided into homogenous groups called strata and then elements from each
stratum are selected based on their proportion to the population.
The fact that WASCO already divided its consumers into groups facilitated the process of
stratified sampling. The groups in which the population was divided are as follows:
- Boats
- Commercial
- Domestic
- Government
- Hotel
It was not possible to obtain a breakdown of the proportion of each stratum to the
population. However, the number of respondents from each stratum was chosen based on the
proportion of revenue that each stratum contributed to WASCO. Though this estimation may
be inaccurate, it was the best estimation possible given the information available.
Distribution of Questionnaires
The questionnaires were administered through two mediums; namely direct contact and via
the telephone.
i) Direct Delivery
The questionnaires delivered directly were given to those respondents who
could have been accessed easily. The questionnaires were given to my parents, who
distributed them to consumers in the vicinity of their workplaces.
All of the domestic consumers were surveyed this way since almost every one
lives in a domestic household. All of the government consumers were also surveyed

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this way, since my parents work in government ministries. Two firms were surveyed
by direct delivery; one in which my father is a shareholder and the other which is
close to my home.
ii) Telephone
Those respondents who would take too much time and money to reach were
surveyed over the phone as this was much more convenient. All of the hotels were
surveyed this way, in addition to one boat. A few firms were also questioned over
the telephone.

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Price Changes
Table Illustrating Changes in Rates Due to Tariff Increase
No. of Gallons Rates / $ per 1000 gallons
Before After
Domestic First 3000 7.35 12.21
In excess of 3000 Gallons 15.00 24.92
Minimum Charge 2000 Gallons 14.70 24.42
Commercial 20.00 33.23
Hotels 22.00 36.55
Government 14.00 23.26
Boats 40.00 66.46
Source: WASCO

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As shown in the graph above, total water consumption fell for most months (April and June -
December) after the increase in tariff compared to those same months before the change in
tariff. Only for the month May was the total water consumption higher after the increase in
tariff.
130
135
140
145
150
155
160
165
170
WaterConsumption/Gallons(Millions)
Month
Total Water ConsumptionBefore and After Tariff
2012
2013

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The graph above shows that total revenue increased for all months after the increase in tariff.
-
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
5,000.00
Revenue/$(000)
Month
Total Revenue Billed Before & After Tariff
2012
2013

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The graph above shows that boat water consumption fell significantly for all months after the
tariff increase was implemented.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
WaterConsumption/Gallons(Thousands)
Month
Boat Water Consumption Before and After Tariff
2012
2013

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The above graph shows that revenue from boat water consumption increased after the tariff
for five months (May, September and October-December). However, for April and the period
June - August, boat water consumption revenue fell after the tariff increase.
0
20
40
60
80
100
120
140
160
180
Revenue/$(000)
Month
Boat Revenue Billed Before & After Tariff
2012
2013

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As seen in the graph above, commercial water consumption after the increase in tariff was
lower for all months before the tariff.
0
5,000
10,000
15,000
20,000
25,000
30,000
Month
CommercialWater ConsumptionBefore & After
Tariff
2012
2013

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As seen in the graph above, water consumption revenue from commercial sources increased
for all months after the tariff increase.
0
100
200
300
400
500
600
700
800
Revenue/$(000)
Month
CommercialRevenue Billed Before & After Tariff
2012
2013

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The graph above shows that domestic water consumption after the tariff increase fell for the
months August and October to December. However, water consumption actually increased
after the tariff increase for the months May, June and September. Water consumption was
approximately the same before and after the tariff for the months April and July.
74,000
76,000
78,000
80,000
82,000
84,000
86,000
88,000
90,000
92,000
94,000
Month
Domestic Water Consumption Before & After Tariff
2012
2013

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The graph above shows that water consumption revenue from domestic households after the
increase in tariff rose for all months.
0
500
1,000
1,500
2,000
2,500
3,000
Revenue/$(000)
Month
Domestic Revenue Billed Before & After Tariff
2012
2013

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As seen in the graph above, government water consumption fell for most months after the
increase in tariff. However, for October, government water consumption rose slightly after the
increase in tariff.
0
5,000
10,000
15,000
20,000
25,000
Month
Gov't Water Consumption Before & After Tariff
2012
2013

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As seen in the graph above, water consumption revenue from government increased after the
tariff change for all months.
0
50
100
150
200
250
300
350
400
450
Revenue/$(000)
Month
Gov't Revenue Billed Before & After Tariff
2012
2013

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As seen above, hotel water consumption actually increased after the increase in tariff for the
majority of the months. The only months in which hotel water consumption fell after the
increase in tariff were for April, October and December.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
WaterConsumption/Gallons(Thouasands)
Month
Hotel Water Consumption Before & After Tariff
2012
2013

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The graph above shows that water revenue from hotels rose for all months after the tariff
increase.
0
200
400
600
800
1,000
1,200
1,400
Revenue/$(000)
Month
Hotel Revenue Billed Before & After Tariff
2012
2013

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Elasticity
The elasticity figures for the different sectors of water consumption were calculated using the
formula which is shown below:
𝑃𝐸𝐷 =
%∆ 𝑖𝑛 𝑄𝐷
%∆ 𝑖𝑛 𝑃
=
𝑁𝑒𝑤 𝑄𝐷 − 𝑂𝑙𝑑 𝑄𝐷
𝑂𝑙𝑑 𝑄𝐷
× 100
𝑁𝑒𝑤 𝑃 − 𝑂𝑙𝑑 𝑃
𝑂𝑙𝑑 𝑃
× 100
Table Illustrating the Elasticity for each sector of Water Consumption
Sector Elasticity
Boat -0.72
Commercial -0.23
Government -0.16
Domestic -0.01
Hotel +0.08
Total -0.05
Source of data used in calculations: WASCO
Sign of PED
The above table shows that the PED for all but one sector was negative. This negative PED is
expected since water is believed to be a normal good i.e. as price rises, quantity demanded will
fall. However, hotel water consumption has a positive PED, which indicates a rise in demand
after a price rise. Nevertheless, the overall PED for WASCO water was found to be negative.
Degrees of Elasticity
The above table shows that the PED for all sub-sectors are inelastic. Overall, WASCO water was
found to be almost perfectly inelastic with a PED of -0.05.

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Changes in Revenue
The percentage changes in revenue were found using the basic formula:
%∆𝑅 =
𝑁𝑒𝑤 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑂𝑙𝑑 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑂𝑙𝑑 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
× 100
Table Illustrating Percentage Changes in Revenue
Sub-Sector %Change in Revenue
Boat +6%
Commercial +41%
Government +48%
Domestic +57%
Hotel +75%
Total +56%
As seen in the above table, revenue increased for all sub-sectors. Overall, there was a 56%
increase in revenue from water consumption.

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Relationship between Elasticity and Revenue
When there is a change in price, the effect on consumer expenditure or total revenue, depends
on the elasticity of the good. This relationship between elasticity and total revenue is illustrated
in the table below:
Table showing Elasticity and Changes in Revenue for different Subsectors
Subsector Elasticity %Change in Revenue
Boat -0.72 Inelastic +6% Increase
Commercial -0.23 Inelastic +41% Increase
Government -0.16 Inelastic +48% Increase
Domestic -0.01 Inelastic +57% Increase
Hotel +0.08 Inelastic +75% Increase
Total -0.05 Inelastic +56% Increase
All the subsectors for which the PED is inelastic experienced an increase in total revenue as a
result of the price rise. This is the norm for inelastic goods after a price increase. This is because
the proportionate rise in price is higher than the proportionate fall in demand. In other words,
the rise in price of the good more than compensates for the fall in quantity demanded.
It should also be noted that the more inelastic subsectors experienced greater increases in
revenues. This is because the more inelastic a good is, the greater will be proportionate rise in
price compared to the fall in quantity demanded.
The only exception to this was the hotel sector. It wasn’t the most inelastic, but it experienced
the greatest increase in revenue. This is due to its positive elasticity. In addition to its price
rising, its demand also rose (unlike the other sectors).

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The graph above illustrates how much respondents value water on a scale of 1 to 5 where 1 is
least and 5 is most necessary.
The majority of respondents (67%) chose the highest possible rating of 5 whilst the second
most common rating chosen was 4 with 20% of respondents selecting it.
This goes to show that WASCO water is a highly necessary good to consumers.
2 0 2
6
20
0
5
10
15
20
25
1 2 3 4 5
No.ofRespondents
Rating
Level of Necessity of WASCO Water to Consumers

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The graph above illustrates the percentage of monthly income/revenue that consumers spend
on WASCO water.
The wide majority of respondents (93%) indicated that expenditure on WASCO water
constituted only 1 – 10 % of their income. The remainder of respondents (7%) indicated that
WASCO water expenditure made up 11- 20% of their monthly income/revenue.
This shows that expenditure on WASCO water only makes up a tiny fraction of consumers’
income.
27
2
0 5 10 15 20 25 30
1- 10 %
11- 20 %
21 - 30 %
31 - 40 %
41 - 50 %
51 - 60 %
61 - 70 %
71 - 80 %
81 - 90 %
90 - 100 %
No. of Respondents
PercentageofMonthlyIncome/Revenue Percentage of Consumers'Monthly Income/
Revenue Spent on WASCO Water

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The graph above illustrates the substitutes to WASCO water available to respondents.
The most frequent answer was bottled water with 90% of respondents selecting this, whilst the
second most selected substitute was rainwater with (50%) of respondents selecting this.
For both river-water and other sources, only 7% of respondents said that it was available to
them. The two ‘Other’ water sources were pond and spring water.
27
15
2 2
0
5
10
15
20
25
30
Bottled Rain River Sea Other
No.ofRespondents
Substitute
Substitutes to WASCO Water Available to
Consumers

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The graph above illustrates the substitutes to WASCO water used by consumers.
Ninety percent (90%) of respondents indicated that they used bottled water whilst 40%
indicated that they used rainwater. The two other alternatives stated by respondents were
pond and spring water.
27
12
2
0
5
10
15
20
25
30
Bottled Rain River Sea Other
No.ofRespondents
Substitute
Substitutes to WASCO Water Used By
Respondents

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The pie chart above illustrates the number of respondents who have decreased their WASCO
water consumption since the price increase.
The majority of respondents (79%) claimed that they have not decreased consumption whilst
the remaining 21% claimed that they actually have decreased consumption.
21%
79%
RespondentsWho Have Consumed Less Water
Since the Increase in WASCO Prices
Yes
No

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The graph above illustrates the percentage of respondents who have increased their
consumption of substitutes to WASCO water since the price increase.
The majority of respondents (75%) claimed that they have not increased consumption of
alternatives to WASCO water whilst 25% claimed that they actually have consumed more
substitutes.
25%
75%
RespondentsWho Have Increased Consumption of
Substitutes Since the Increase in WASCO Prices
Yes
No

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The graph above shows the number of respondents who use certain water sources for bathing.
None of the substitutes are used by the respondents as much as WASCO water for bathing. The
substitute with the highest number of respondents is rain-water with 9 respondents which is
nowhere near the 22 respondents who use WASCO for bathing.
22
9
1
0
5
10
15
20
25
WASCO Bottled Rain River Sea Other
No.ofRespondents
Source
Sources of Water RespondentsUse for Bathing -
WASCO vs Substitutes

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The graph above shows the number of respondents who use certain water sources for drinking.
Bottled water is shown to be used as much as WASCO water for drinking, actually, it is used
even slightly more. None of the other substitutes are used by as many respondents as for
WASCO water.
20
21
0 0 1
0
5
10
15
20
25
No.ofRespondents
Source
Sources of Water RespondentsUse for Drinking -

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The graph above shows the number of respondents who use certain water sources for cooking.
None of the substitutes for WASCO water are used by as many respondents as the WASCO
water itself. The substitute with the highest number of respondents is bottled-water with 9
respondents which is nowhere near the 21 respondents who use WASCO water.
21
5
2 0 1
0
5
10
15
20
25
No.ofRespondents
Source
Sources of Water RespondentsUse for Cooking -

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The graph above shows the number of respondents who use certain water sources for cleaning.
None of the substitutes for WASCO water are used by as many respondents as the WASCO
water itself. The substitute with the highest number of respondents is rain-water with 10
respondents which is nowhere near the 29 respondents who use WASCO for cleaning.
29
2
10
1 2
0
5
10
15
20
25
30
35
No.ofRespondents
Source
Sources of Water RespondentsUse for Cleaning -

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The graph above shows the number of respondents who use certain water sources for
gardening/farming.
The only substitute which comes close to WASCO water is rain-water, which 8 respondents use
compared to the 13 respondents who use WASCO water.
13
2
8
1 0
0
2
4
6
8
10
12
14
No.ofRespondents
Source
Sources of Water RespondentsUse for
Gardening/Farming - WASCO vs Substitutes

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Analysis
Factors Affecting Water Consumption
The first law of demand states that the quantity of a good demanded per period of time will fall
as price rises; ceteris paribus (Sloman, 2011). Hence, one would expect that water consumption
would fall as a result of the 66.15% price rise.
However, this may not necessarily be the case. The first law of demand is based on the
assumption of ceteris paribus; that all other factors are being held constant. In actuality though,
there are several other factors apart from price which affect the demand for WASCO water.
As stated by Mr. Martial, there are seasonal factors affecting boat water consumption. He
stated that consumption peaked from November to March, which would see a lot of visitors
from temperate regions which are very cold during that period.
Moreover, Mr. Martial explained that the population, in terms of the number of consumers was
also a factor affecting the demand for WASCO water. He said that expansions in the form of
new houses and housing developments would increase domestic water demand whilst the
creation of new government offices would increase government consumption. From these
comments it can be safely assumed that expansion in any other sector would increase its
demand e.g the creation of a new hotel would increase hotel consumption.
Furthermore, income is also a factor which affects the demand for water. It was shown in
studies by Saleem (2012), Nauges & Thomas (2000), Hoffmann et al (2006) and Renzetti (2002)
that Income has a positive correlation with water consumption, i.e. the higher one’s income,
the more water that they will demand.
Of these three other factors, the factor of seasonal changes in demand is held constant. Total
consumption before the tariff (2012) and after the tariff (2013) comprised of the same seasons
(months). For example, the total consumption before the tariff (2012) ran from the months
April – December. Likewise, the total consumption after the tariff increase (2013) represented
the period April – December. Hence, because the total consumption before the tariff and after

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the tariff comprised of the same seasons (April-December), we can eliminate seasonal changes
as a factor that would cause the 2012 consumption to vary from 2013 consumption.
Moreover, the change in income can be assumed to be negligible due to the short time period
involved. It is highly unlikely that income of St. Lucians would change significantly over the
period of one year.
Effect of Price Change on Consumption
All but one sector (hotel) experienced a fall in consumption after the tariff increase. Water
consumption for boats fell by the largest percentage (48%) whilst domestic households
experienced the lowest percentage fall in consumption (1%).
However, hotel water consumption actually increased after the price rise; it rose by 5%. The
most obvious explanation would be to point out the construction of new hotels after the tariff
increase. However, according to Mr. Martial, no new hotels have been connected to their lines
since the price rise. Instead, it was found out that two major hotels actually experienced severe
leaks sometime after the tariff increase; thus driving consumption up. Both hotels experienced
major leaks in August 2013 which explains the extremely high hotel consumption figure for that
month.
Overall, there was a fall in consumption of WASCO water of 4%.
Price Elasticity of Demand
This is the responsiveness of quantity demanded to a change in price. (CXC, 2011) Two factors
matter when interpreting the elasticity figure for a good. The first is the sign of the figure;
ordinarily, a good would have a negative PED, because of the inverse relationship between
quantity demanded and price. The second factor is the degree of elasticity. An elasticity greater
than 1 represents an elastic good whilst a PED less than 1 indicates that a good is inelastic.

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All subsectors except the hotel subsector had negative elasticity figures, which were expected
since they experienced a fall in consumption.
As for the degree of elasticity, all sub-sectors were found to be inelastic i.e. their percentage
change in price was greater than their percentage change in quantity demanded. The boat
sector was closest to being elastic, with a PED of -0.72 whilst the domestic sector was the most
inelastic. In fact, the domestic sector was almost perfectly inelastic; its PED was -0.01.
Overall, WASCO water was found to have a very inelastic PED of -0.05; a nearly perfectly elastic
PED figure. Thus the demand curve for water would be a very steep one; almost vertical in
nature; such as the one shown in Fig 1 below:
Fig 1: Inelastic Demand Curve

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Factors Affecting PED of Water
There are three main factors which affect the PED of a good; how necessary it is, the
percentage of a consumer’s income that it takes up and the number & closeness of substitutes
to the good (Bahaw, 2011).
The more necessary a good is, then the more inelastic its demand will be. This is because
consumers will need to buy it whatever the price; a change in price has little effect on quantity
demanded (Sloman, 2011). The results of the questionnaire revealed that water is highly
necessary to consumers. The majority of consumers (67%) rated its necessity as 5 out of 5.
Converting these results to a mean level of necessity gives 4.4 of 5 which re-enforces the
already widely known fact that water is a very necessary good. This obviously is a factor for its
highly inelastic PED figure.
Furthermore, the percentage of a consumer’s income that a good takes up is also a key factor
affecting PED. The lower the percentage of a consumer’s income that a good takes up, the
more inelastic it will be (Bahaw, 2011). The questionnaire revealed that the majority of
respondents (90%) spend only between 1- 10% of their monthly income on WASCO water. Thus
it can be concluded that WASCO water accounts for very little of consumers’ income which is
another factor that contributes to its highly inelastic PED.
Moreover, the availability and closeness of substitutes also affects the PED of a good. The more
and closer substitutes available to the good, the more elastic it would be, as consumers would
easily be able to switch to other goods if its price changed. (Sloman, 2011).
In terms of the number of substitutes, the questionnaire revealed that there were only two
significant substitutes available to respondents; bottled water and rain-water.
Furthermore, the closeness of the substitutes was measured based on how much the
respondents used these substitutes for the same functions as WASCO water. This logic was
based on the premise that if a water source has very similar characteristics to WASCO water

41 | P a g e
then respondents would be willing to use it for the same functions that they use WASCO water
for.
Based on this measurement, no substitute came close to WASCO water. Though, respondents
used bottled water as much as WASCO water for drinking purposes – they didn’t use it as much
as WASCO water for other purposes. This was similar to rainwater, where respondents used it
as much as WASCO water for gardening/farming purposes but not for any other purpose.
Mr. Martial also explained why other water sources are not close substitutes to WASCO water.
He said that alternative sources such as rain/river/sea water cannot compete with WASCO
water because they are not of a high enough quality. Meanwhile though bottled water is of a
higher quality than WASCO water, it is much more expensive. Per thousand gallon, bottled
water costs 900 times more than WASCO water! Hence it can be concluded that the lack of
close substitutes is also a factor which contributes to the highly inelastic PED of water.
The questionnaire re-enforced the inelastic nature of WASCO water. The majority of
respondents (79%) claimed that they have not reduced water consumption since the price
increase. The majority of respondents (79%) also said that they have not increased
consumption of substitutes to WASCO water since the price increase.
Effect on Revenue
Revenue increased for all sub-sectors. This increase in revenue was due to the fact that the
quantity of water demanded for all sub-sectors was inelastic; the rise in price more than
compensated for the fall in quantity demand. This is explained in Fig. 2 below which shows the
relationship between the demand and total revenue (TR) curves. It illustrates, that along the
inelastic portion of the demand curve, an increase in price will lead to an increase in total
revenue; which has been the case for the price increase in WASCO water.

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Fig 2: Graph Illustrating Relationship Between Elasticity and Total Revenue
Revenue from hotels experienced the greatest proportionate increase in revenue (75%). This is
because not only did the price rise, but the demand also rose, unlike other sub-sectors whose
demand fell. On the other hand, the smallest revenue increase (6%) came in the boat sub-
sector. This was because this sector was the least inelastic. Overall, water revenue increased by
56% after the price rise.
It should be noted however, that the revenue figures used are not necessarily how much
money that is collected. Mr. Martial stated that on average, around 90% of bills are actually
collected, meaning that about 10% of bills usually go unpaid. Given that WASCO bills an average
of roughly $4,000,000 per year; this means that about $400,000 of revenue is not collected.
This is a sizeable amount of cash which could surely serve the company well.

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Prediction of Long Term Effect
The effect of the 66.15% price rise will obviously be a decrease in water consumption. However,
due to the influence of other factors affecting water consumption, we will not necessarily see a
fall in water consumption in the longer term.
The general increase in the human population of St. Lucia, will likely push water consumption
higher. The construction of new hotels and establishment of new firms are also likely to
increase water consumption. Moreover, as income increases in the long-term, water
consumption will also increase.
However, in the long term, WASCO might as well succeed in raising the price of water once
more, which will reverse the effects of increasing population and incomes. It is likely that
WASCO will persist in trying to raise the price of water, especially since the 66.15% rise was
originally a request for a 90% price rise.
Moreover, people’s attitudes towards water conservation can affect long term trends in water
consumption. Given the growing number of advocates for water conservation, people might
begin to use water more sparingly. Moreover, with technology continually evolving, it is likely
that scientists will find new ways to conserve water in the future. This increase in water
conservation will reduce the quantity of water demanded in St. Lucia; ceteris paribus.
Therefore, it can be said that the pattern of water consumption in the long term is uncertain,
due to the different factors that can influence its demand.

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Findings
1. After the price increase of WASCO water, consumption fell for all sub-sectors except the
hotel sector. This rise in consumption for the hotel sector was due to severe leaks
suffered by two hotels after the tariff increase. Overall, there was a total decrease in
water consumption.
2. The elasticity of demand of the 66.15% price rise was inelastic for all the sub-sectors.
Overall, WASCO water was found to be almost perfectly inelastic with an elasticity of -
0.05.
3. It was found that several factors contribute to the highly inelastic nature of WASCO
water. These are; its high level of necessity, the fact that it constitutes only a small
percentage of consumers’ income and the lack of close substitutes.
4. Though in the short term, the 66.15% price rise has resulted in water consumption
falling, it is uncertain whether this effect will hold in the long term due to the multitude
of other factors influencing the demand for WASCO water.

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Recommendations
1. WASCO should persist in trying to raise the price of water further though it depends on
the generosity of the NWSC. A further increase in prices will most likely boost revenues
since water is very inelastic. However, one can argue that since water is a good that is so
important to the well being of human beings, the price should be kept as low as possible
so that everyone can have access to it.
2. Mr. Martial said that unpaid bills are dealt with by calling the customers to remind them
and by implementing disconnection campaigns. However, given that uncollected
revenue, on average, amounts to $400,000 per month. WASCO should put better
strategies in place to ensure that more bills are actually paid by customers. This would
reduce the amount of bad debts incurred and help cash flow.

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Conclusion
After the 66.15% price rise, there was an overall decrease in water consumption. However, due
to the highly inelastic nature of the water, total revenue actually increased. This highly inelastic
nature of WASCO water is due to its high level of necessity, the fact that it constitutes only a
minor percentage of consumers’ incomes and the lack of close substitutes. Though in the short
term, the 66.15% price rise has resulted in water consumption falling, it is uncertain whether
this effect will hold in the long term due to the multitude of other factors influencing the
demand for WASCO water.
If the recommendations above are implemented or any other innovative strategies, WASCO
should be on the way to a more secure financial future.

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Bibliography
Bahaw, Edward. (2011) CAPE Economics Unit 1 – 2nd edition. La Romaine, Trinidad: Caribbean
Educational Publishers.
Sloman, John. (2003) Economics – 5th edition. Essex, England: Pearson Education Limited.
Caribbean Examinations Council. (2011) Economics CAPE Unit 1. Cheltenham, England: Nelson
Thornes Ltd.
Saleem, Faiza. (2012) Factors Affecting Water Demand in Abbotabad. Ms, COMSATS Institute of
Information Technology.

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First Interview with Mr. Darnell Martial
WASCO Finance Manager
WASCO Head Office – San-Souci
Wednesday 11/12/13
1. Who owns WASCO?
WASCO is a government owned corporation. It was formed under the Companies Act.
2. What are the barriers preventing potential water providers from entering the market?
The main barrier to entry is the exorbitantly high startup cost involved in setting up a
water network. Moreover there are licenses that one needs to obtain in order to enter
the market. The first is an abstraction license, issued by the Water Resource
Management Authority (WRMA). This license gives an entity permission to tap into the
country’s water reserves. The second is an operating license, issued by the National
Water & Sewerage Authority (NWSC). This gives a firm the legal right to sell water
commercially. WASCO is the only entity in possession of the two licenses mentioned
above.
3. How much control over the price of water does WASCO have?
WASCO has control over the price of water to a certain extent. The price is regulated by
the NWSC, who WASCO needs to apply to for a price change.
There are three types of applications for price changes:
 Yearly Application : this is an application due to inflation
 Extraordinary Application : this is an application for an increase due to a natural
disaster
 Triennial Review: this is an application made for a price increase due to last three
years. After the 3 year period the NWSC will decide if the price change will
remain.

49 | P a g e
4. Are there any close substitutes for WASCO water?
None of the alternative water sources can really compete with WASCO water. Sources
like rain, river and sea water are not as high quality as WASCO water. Sandals Hotel has
a desalination plant which could treat sea water to get it into a potable state. However,
it is much too expensive and buying WASCO water is a much cheaper option. More so,
even with the sea water getting treatment, WASCO water is still of a high quality; it
tastes better.
Though bottled water as good as and even better than WASCO water in terms of quality,
it is much more expensive. In fact, some of the bottled water sold in St. Lucia cannot
really be considered a substitute to WASCO water since DuBoulay’s Bottling Company
buys water directly from WASCO. Hence, to buy DuBoulay’s bottled water would be
buying indirectly from WASCO in a sense.

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Second Interview with Mr. Darnell Martial
WASCO Head Office – San-Souci
Thursday 23/01/14
5. Are there any seasonal factors affecting water consumption for any sector?
Boat arrivals usually increase from November to March. These months are very cold in
temperate countries hence you find that more tourists will come to St. Lucia during this
period of time. The peak month is February which is usually the coldest month.
Incidents happened concerning boats in 2012; a tourist from a boat was killed. Hence a
few boats pulled out but they came back in 2013.
6. Water consumption after the price rise actually increased for some months in 2013
compared to 2012. What are some possible reasons for this?
Government consumption might be higher because of expansion; the government
creating new office spaces.
Domestic consumption always goes up because there are always new subdivisions
(houses and housing developments) to supply water to.

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Third Interview with Mr. Darnell Martial
Via Email & Telephone
Sent (Email) – Sunday 9/03/14
Replied (Mobile Phone) – Monday 10/03/14
7. Has there been the construction or opening of new hotels around the time when the
tariff increase was implemented? If not, what else could explain the increase in hotel
consumption? I realized that in August 2013, consumption was unusually high. What is
the reason for this? It might explain why hotel water consumption actually went up
after the tariff increase.
Two hotels experienced severe leaks in August 2013. The first hotel suffered the leak for
several months as they weren’t able to find it. However it got so bad by August, that
they called in a WASCO leak detection crew in September to fix the problem.
The other hotel which experienced a leak only suffered it in August. They detected it
very quickly and fixed it themselves.
8. On average, how much of the revenue billed is actually collected? Does a significant
amount of billed revenue go unpaid every month? What is the company's policy for
treating these arrears? Do you eventually write them off as bad debts?
On average, 90% of billed revenue is collected, meaning that 10% usually goes unpaid.

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The strategies put in place to ensure that arrears are paid include frequently calling
customers to remind them and implementing disconnection campaigns.
Arrears are written off as bad debts only if circumstances make it highly likely that
payment will not be received, such as in the case of the death of a customer.

Cape Economics SBA

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