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This paper examines urban residential water demand for the city of Zahedan in Iran using the data over the period 1999 – 2006. The continuously intensifying scarcity of water resources is a crucial problem in almost all contemporary societies. Even in areas where there are adequate quantities of water. The problem of scarcity is usually confronted through the deterioration of water quality resulting in increasing costs for certain water uses. In the framework of water demand, it is vital to analyze and understand the characteristics of water demand. There are several important questions that need to answer. They are as follows: How the demand is formulated? Which factors determine the demand? How the demand responds to the changes in income and the cost of water? Stone-Gray approach is used to model and answer the above questions. The results show that the main determinants of residential water demand comprise water price, income, and temperature. The price elasticity of demand equals –0.06 while the income elasticity equals 0.062. Finally, the findings confirm that the minimum water requirements are 95 liters per person per day.

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In recent decades, due to water crisis, most countries have been more interested in new policies for managing water demand instead of regulating the water supply. In dry and semi-dry areas of Iran such as Fars province, water scarcity is not only the important factor that impedes economic development but also special input in production. Drought in year 2007 could be considered as a risk of crisis in water supply. So, the purpose of this study is managing water demand through economizing surface water and groundwater resources which is of special importance in the region. It is self-evident that agricultural economy has a close relationship with water management. In this research the standard Positive Mathematical Programming (PMP) method is used to calibrate the agricultural sector model. A two-stage stratified random sampling through personal interviews of Bakan from Eghlid farmers has been applied, where abundant water resources and groundwater exist. By selecting a real sample of farms, model calculation for both areas is carried out. Two scenarios are identified. In the first scenario, by using PMP model for each group from water resources are calculated separately. They differ in terms of net revenue which is because of overly cost of construction and operation of wells between the two groups of surface water and groundwater. Results show that 10% decrease in water supply or doubling the prices will not change the optimal crop pattern in comparison to the base pattern. The results of model calculation shows that through running new irrigation methods (intensive irrigation) and also by effective pricing policies, investment can be encouraged in the water sector and in the area and therefore, through optimum management of water demand the water resources can be saved and any form of waste avoided.

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The optimization of water use will be an important issue for Iran in the coming years.  In this paper, the gap between current and optimal water use has been estimated using Spatial Durbin Model (SDM), as special case of Spatial Panel Data, for 18 selected provinces during 2003-2015.  Notable characteristic of this model in comparison with other spatial models (including SEM and SAR) is to enter spatial lags of dependent and explanatory variables in the model simultaneously. This model has been selected by Wald Test. Results show that population and income have positive effects on residential water consumption, but water tariff has negative impact on domestic water use. According to the findings, water tariff can be applied as an instrument for controlling the level of water consumption. Especially in high-consumption provinces, water pricing can be more effective in reducing water use.