Residential energy conservation choices of poor households during a period of rising fuel prices

Abstract

This study models the production and consumption of residential space heat, a non-market good. Production reflects capital investment decisions of households; consumption reflects final demand decisions given the existing capital stock. In the model, the production relationship is represented by a translog cost equation and an energy factor share equation. Consumption is represented by a log-linear demand equation. This system of three equations - cost, fuel share and final demand - is estimated simultaneously. Results are presented for two cross-sections of households, surveyed in 1973 and 1981. Estimates of own-price and cross-price elasticities of factor demand are of the correct sign, and less than one in magnitude. The price elasticity of final demand is about − 0.4; the income elasticity of final demand is less than 0.1. Short-run and long-run elasticities of demand for energy are about − 0.3 and − 0.6, respectively. These results suggest that price-induced decreases in the use of energy for space heat are attributable equally to changes in final demand and to energy conservation, the substitution of capital for energy in the production of space heat. The estimated model is used to simulate the behavior of poor and non-poor households during a period of rising energy prices. This simulation illustrates the greater impact of rising prices on poor households