Abstract
We exploit unique features of a recently introduced tariff schedule for natural gas in Buenos Aires to estimate the short‐run impact of price shocks on residential energy utilization. The schedule induces a non‐linear and non‐monotonic relationship between households' accumulated consumption and unit prices, thus generating exogenous price variation, which we exploit in a regression‐discontinuity design. We find that a price increase causes a prompt and significant decline in gas consumption. The results also indicate that consumers respond more to recent past bills than to expected prices, which argues against an assumption of perfect awareness of complex price schedules by consumers.
Highlights
Suppose that energy prices experience a shock
We find that an increase in the average price of natural gas in the utility bill received by consumers induces a statistically significant and prompt decline in residential gas utilization: a 25% price increase reduced residential gas consumption by 3.8% in the subsequent two-month period
We focus on the residential market for natural gas in Greater Buenos Aires
Summary
Suppose that energy prices experience a shock. Does energy consumption respond? How much and how promptly? These are key questions in the study of a wide range of macroeconomic, regulatory and environmental issues, such as the transmission channels of energy price shocks, optimal taxation and pricing policies in energy markets, and interventions to address climate change. Economists have a long-standing interest in estimating consumption responses to price changes in energy markets.. Economists have a long-standing interest in estimating consumption responses to price changes in energy markets.1 Progress towards this aim has been complicated by an important identification challenge, . The introduction of a threshold for defining unit prices based on previously accumulated consumption approximates a randomly assigned price differential for a large number of consumers on each side of the threshold, allowing us to build treatment and control groups to estimate the impact of interest. The revised schedule was composed of eight new tariff groups, each facing different variable fees per cubic meter; see Table I. This schedule introduced significantly higher unit prices for those consumers with higher levels of annual accumulated consumption. We exploit the resulting discontinuity in variable prices at the annual consumption level that divides categories R32 and R33 to examine consumption responses to price shocks.
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