Environ Resource Econ DOI 10.1007/s10640-014-9846-0 Responses to Changes in Domestic Water Tariff Structures: A Latent Class Analysis on Household-Level Data from Granada, Spain María Pérez-Urdiales · María A. García-Valiñas · Roberto Martínez-Espiñeira Accepted: 7 November 2014 © Springer Science+Business Media Dordrecht 2014 Abstract A problem that affects the estimation of water demand functions is the presence of unobserved individual heterogeneity, which means that a common demand function is unlikely to represent the behavior of all users. We implement Latent Class Models to esti- mate water demand functions for four groups of users who are classified according to their unobservable preferences. This more flexible approach makes it possible to distinguish four different response patterns to changes in the drivers of water use, including different price elasticities. These results should be of particular interest to regulators who would like to tailor water demand management policy to heterogeneous users. Our analysis exploits household- level panel data on residential water demand and consumers’ characteristics obtained by combining information from a survey of 1,465 domestic users in the city of Granada and bimonthly price and consumption data supplied by this city’s water supplier from the period 2009–2011. Keywords Water demand · Water pricing · Latent class analysis · Household microdata JEL Classification Q21 · Q23 · Q25 1 Introduction Demand for water is expected to increase during the next few years as the world population is also predicted to grow from 6.9 billion in 2009 to 8.3 billion in 2030 and 9.1 billion in M. Pérez-Urdiales (B ) Facultad de Economía y Empresa, University of Oviedo, Av. del Cristo s/n, 33006 Oviedo, Spain e-mail: perezumaria@uniovi.es M. Pérez-Urdiales · M. A. García-Valiñas Oviedo Efficiency Group, University of Oviedo, Oviedo, Spain R. Martínez-Espiñeira Department of Economics, Memorial University of Newfoundland, St. John’s, Canada 123