Abstract
This paper demonstrates the importance of modelling energy-intensive household services in general, and private transportation in particular, as combinations of energy and other inputs. Initially a partial equilibrium approach is used to analyse private transport consumption as a self-produced commodity formed by household vehicle and fuel use. We particularly focus on the impact of private vehicle-augmenting technical progress in this framework. We show that household fuel use will fall if it is easier to substitute between vehicles and fuel in the household production of private transport services than it is to substitute between private transport and the composite of all other goods in overall household consumption. The analysis is then extended, through Computable General Equilibrium simulation, to investigate the wider implications of similar efficiency improvements when intermediate demand, prices and nominal income are endogenous. The subsequent reduction in the price of private transport service (not observable in market prices) allows the wage measured relative to the CPI to rise whilst the wage relative to the price of foreign goods falls. This simultaneously increases UK international competitiveness, encouraging increased exports and reduced import penetration whilst allowing employment to rise. This provides an additional supply-side stimulus to production, employment and household income.
Highlights
Adapting a general result derived in Holden and Swales (1993) to this particular setting, we identify the condition under which such an efficiency increase reduces the household fuel use in a partial equilibrium analysis
Any reduction here in the fuel-intensity of private transport, and the possible lower household and total use of refined fuels in aggregate, is not brought about by an exogenous improvement in fuel efficiency. Rather it is driven by an endogenous reaction to an improvement in the efficiency of a closely-linked good, either as a substitute or complement, in this case vehicles. This shows the importance of modelling energy-intensive household services in general, and private transport in particular, as the output of a number of inputs
In determining the overall impact of technical progress in vehicles on the demand for fuel, it is fundamental to take into account changes in the quantity demanded of private transport
Summary
Adapting a general result derived in Holden and Swales (1993) to this particular setting, we identify the condition under which such an efficiency increase reduces the household fuel use in a partial equilibrium analysis. This occurs where the elasticity of substitution between fuel and vehicles in the household production of private transport is greater than the elasticity of substitution between private transport and the composite of all other goods in household consumption. The third aim is to extend the analysis through simulation using the UK-ENVI Computable General Equilibrium model These simulations investigate the wider implications of household vehicle-augmenting efficiency improvements where prices, real and nominal incomes are endogenous. The CGE work supports and extends the partial equilibrium findings
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