An Econometric Model of the Joint Production and Consumption of Residential Space Heat

Abstract

The demand for residential energy arises from the desire for basic amenities, such as heated or cooled living space, hot water, and cooked food. These amenities are nonmarket goods; they are simultaneously produced and consumed within the household. Conceptually, production and consumption are separable. The production decision involves the optimal choice of factor inputs, given the desired amenity; the consumption decision involves the choice of the level of amenity, given the price of that amenity relative to other goods. This study focuses on residential demand for space heat. This focus was chosen for the following reasons: 1. Space heat accounts for over half the energy consumed in a typical household [17]. An increase in the price of primary heating fuel may have noticeable impact on disposable income, particularly in poor households; and 2. Energy demand for space heat can be controlled in the short run, by changing final demand for space heat (i.e., adjusting the thermostat) and in the long run by changing production technology (i.e., substituting capital for energy through energy conservation or changing the heating system and/or space heating fuel.) The econometric literature has used several alternative approaches to model the residential demand for energy. Dynamic models have been used to derive estimates of long-run and short-run elasticities of demand for energy in the residential sector from aggregate time-series or pooled cross-section/time-series data [9; 12]. The availability of household survey data makes it possible to model appliance choice and energy use conditioned on that choice in a joint discrete/continuous choice framework. McFadden, Puig, and Kirshner [14]; Hausman [11]; and Dubin and McFadden [7] model jointly the discrete choice of energy-using appliances with the continuous demand for energy. Cameron [4] focuses on energy conservation as the discrete choice, again with energy demand as the joint continuous decision. Household production theory has been applied to several recent studies that relate the production of household services to the derived demand for energy, capital, land, and labor [16; 19]. This approach is similar to that found in the industrial energy demand literature [2; 10].