Abstract
The empirical literature on the demand for electricity has, hitherto, failed to adequately deal with increasing block pricing. While it is desirable, in principle, to include the entire price schedule in the demand function, the convention has been to include, as an argument, either an average or a marginal price. Yet use of either to the exclusion of the other one leads, inter alia, to biased estimates of own-price elasticity. With this in mind, a residential demand function is estimated employing both average and marginal price. While a number of interesting results emerge, it is significant that the coefficient on marginal price is ‘right’; that is, the expected inverse relationship between the quantity of electricity demanded and the marginal price it obtains. On the other hand, the positive sign on average price is troubling. Because average price is in this case exactly the same concept as the intra-marginal payment, a change in average price is exactly the same concept as a change in real income. T...
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