When Cities Run Dry: Equilibrium Effects of Water Scarcity in Cape Town

Cape Town faced an unprecedented water crisis between 2015 and 2018, bringing the city to the brink of “Day Zero,” when municipal water supplies were expected to run dry. In response, the city implemented substantial water price increases to curb water use across both domestic and industrial users. This crisis created a natural experiment to study how cities can manage scarce resources during environmental emergencies and how pricing policies shape both immediate and longer-term urban outcomes. 

This study will proceed in three stages. First, it will use detailed administrative and utility data to measure how different sectors, neighbourhoods, and income groups responded to sharp water price increases. Second, it will assess broader equilibrium effects, including how water constraints affected labour markets, firm location decisions, and residential mobility. Third, the project will build a structural model of the city that incorporates these empirical findings to simulate alternative policy approaches. In collaboration with the City of Cape Town, the researchers aim to translate these insights into actionable policy recommendations and pilot optimised pricing structures to improve urban resilience in the face of climate change and growing resource scarcity.