Demand-side technology standards under inefficient pricing regimes - Are they effective water conservation tools in the long-run?

When price-setting regulators have objectives other than maximizing social surplus, the conservation potential of demand-side technology standards can be significantly diminished. This paper demonstrates this by empirically recovering the socially sub-optimal preferences of a group of water managers in a groundwater-dependent region of California and simulating their inefficient price response to the mandated adoption of low-flow appliances by homeowners. The resulting reduction in the conservation potential of these appliances is quantified, and a modest tax is shown to be a relatively cost-effective policy tool for conservation. If non-price conservation policies are preferred according to equity criteria, the paper suggests that, in order to preserve their conservation potential, policy-makers should be required to continue to set prices as if no technology standards had been introduced.