Price elasticity of demand for fuels by income level in Mexican households

Abstract

The price elasticities demand of electricity, gas, oil fuel, gasoline and steam coal are estimated using household surveys from 1992 to 2014. The analysis uses alternative econometric techniques – OLS, SURE, and Quadratic Almost Ideal Demand System (QUAIDS) – the last of which is based on the methodology of Banks, Blundell and Lewbel considering socioeconomic characteristics of the households to account for the difference in demand of energy related goods. It is found that the demands for fuels are price inelastic, and the differences in elasticities between poor and non-poor households are small but statically significant. The income elasticity of demand is generally found to be positive and higher in absolute value than price elasticity, and the differences are greater between poor and non-poor. Consequently, there would be a differentiated reaction of consumers to changes in energy prices according to their poverty status. Steam coal and firewood, each of which could be considered inferior goods, stand as counterexamples in that the income elasticity is found to be negative. The contribution of this study helps policy makers to analyze household welfare when applying changes in energy prices in the face of fiscal and/or energy reforms, such as those Mexico is implementing.