Movement along vs. shift of demand curve: Water chlorination (Context Rich Problem)

Author: Amy McCormick Diduch, Mary Baldwin College
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

Summary

Students read a brief description of an experiment designed to find the best method to increase water chlorination in Kenya. The main policy choices can be illustrated as a movement along a demand curve (by lowering prices of chlorine) or shifting a demand curve (through attempts to persuade households to use the chlorine). Percentage changes in price and quantity are provided, allowing students to calculate an implied elasticity of demand.

Learning Goals

Students will be able to distinguish between a movement along a demand curve and a shift in a demand curve in a real policy context and learn to identify a situation with inelastic demand.

Context for Use

This problem is appropriate for a Principles of Microeconomics course after students have covered concepts of demand and elasticity. It can be completed in approximately ten minutes of class time or as a homework assignment.

Description and Teaching Materials

In many developing countries, contaminated water supplies lead to frequent outbreaks of disease. Diarrheal diseases are a leading cause of death in the developing world. Even when not fatal, these diseases can cause long term harm to children's cognitive and physical development. A widely available and inexpensive method of disinfecting water supplies is the addition of bottled chlorine to the water used in the home. In Western Kenya, where awareness of water contamination issues is high, a recent study found that only 5 percent of households used chlorination to disinfect their water.

In a set of experiments designed to determine the most effective method of increasing water chlorination, the Poverty Action Lab learned that most households have a low willingness to pay for chlorine. A 50% reduction in the monthly price of chlorine (from $0.30 to $0.15) resulted in a 10% increase in chlorine usage. When provided for free, 58% of households used the chlorine. However, hiring local community members to promote chlorine use among neighbors was found to be highly effective at increasing usage rates.

You plan to explain these results in a forum on developing world health issues next week. To compare the effectiveness of the two policies (lowering prices vs. persuasion), you sketch a demand curve for chlorine that roughly illustrates the pricing policy. What is the impact of persuasion on this demand curve? Can you speculate on why there is low willingness to pay for chlorine?

 

The problem is also provided in the attached file. 
Demand for water chlorination (Microsoft Word 2007 (.docx) 14kB Mar8 12) 


Teaching Notes and Tips

The problem directs students to sketch a demand curve to illustrate the situation. Instructors can make the problem more difficult by removing this direction and simply asking students to compare the effectiveness of the two policies (lowering prices vs. persuasion). Instructors may also want to specify the audience for the forum - other students? Professionals? Students might find it difficult to understand why households would not be willing to pay much for a lifesaving treatment. The study's authors suggest there are large spillover effects of chlorination use.

Assessment

The purpose of the assessment will determine whether or not you need a rubric. If the problem will be graded, it may be helpful to give the students a rubric such as:

  • Grade=A: All economic reasoning in the answer is correct. All relevant graphs are included. All relevant economic terms are included. May have 1-2 minor mistakes, such as a missing label on a graph.
  • Grade=B: Economic reasoning in the answer is correct, but some relevant economic terms are missing or graphs contain minor mistakes.
  • Grade=C: Contains significant errors in the economic reasoning. Many relevant economic terms are missing or used incorrectly. Graphs contain some significant errors.
  • Grade=D: Very little of the economic reasoning is correct and relevant to the problem. Nearly all relevant economic terms are missing or used incorrectly. Graphs are missing or contain several significant errors.
  • Grade=F: None of the economic content is relevant to the question.

References and Resources

For more information about this specific experiment and its results, see Kremer, et. al., "Source Dispensers and Home Delivery of Chlorine in Kenya," http://www.poverty-action.org/study/source-dispensers-and-home-delivery-chlorine-kenya. The Poverty Action Lab website has many other interesting experiments that can be used to motivate class discussion of individual responses to economics incentives.