Long-run Price Elasticities Research Articles

The price and income elasticities of natural gas demand: International evidence

Natural gas contributes a growing share of the world's energy mix. In this paper we use national-level data for a sample of 44 countries to estimate the price and income elasticities of natural gas demand. We present both single-equation results and results instrumenting natural gas prices with proved natural gas reserves. Our instrument includes both domestic reserves and distance-weighted reserves in other countries. We obtain estimates of the average long-run price elasticity of natural gas demand of around −1.25 and of the average long-run income elasticity of natural gas demand of +1 and higher. We also present separate estimates for final natural gas demand by industry and households.

The regional impact of a CO2 tax on gasoline demand: A spatial econometric approach

In order to reduce CO2 emissions and mitigate climate change, several countries around the world have introduced a CO2 tax on energy consumption. Switzerland has already introduced a CO2 tax on gas and heating oil and is considering introducing a CO2 tax on gasoline and diesel as well. The effectiveness of such a tax depends on the level of the short- and long-run price elasticity. Moreover, acceptance of a CO2 tax by a society depends on both the distributional effects of such a tax among households and its spatial effects among regions. In this paper, the regional impact of a hypothetical CO2 tax on gasoline consumption in Switzerland is analysed by estimating a demand function for gasoline using panel data from 547 Swiss municipalities from 2001 to 2008. Gasoline sales were collected from the five largest gasoline companies operating in Switzerland, covering about 60% of overall sales. Swiss municipalities are relatively small units, and car ownership and use in one municipality is thought to influence gasoline sales in the neighbouring ones. Accordingly, the method used in the model also accounts for spatial correlation in the consumption of gasoline. Overall, our spatial econometric analysis shows that the tax burden of a CO2 tax will be higher in rural areas than in urban areas.

Estimating the Supply Response of Maize in South Africa: A Nerlovian Partial Adjustment Model Approach

ABSTRACTMaize is the most important crop in South Africa, being both the major feed grain for livestock and the primary staple food crop for the majority of the population. Farmers’ production decisions regarding maize and their response to policy incentives are critical for national food security and regional trade. The aim of the study was to estimate the supply response of the South African maize sector to price and non-price incentives. A Nerlovian partial adjustment model was applied to historical time series data of area under maize cultivation, measured in hectares spanning from 1980-2012 to determine the supply response. Results indicate a short-run price elasticity of 0.24 and a long-run price elasticity of 0.36, signifying that maize farmers are less sensitive to price changes than non-price incentives. The results confirm that non-price incentives such as rainfall and technology seem to have more effect on maize supply than price incentives in South Africa. Given the findings, the study recommends policies and programmes that focus more on non- price incentives, such as technology and infrastructure development, investment in irrigation and research services, as a means of stabilising maize production in South Africa.

Shift in demand elasticities, road energy forecast and the persistence profile of shocks

We forecast demand and investigate the shift in price and income elasticities and the persistent profile of shocks for diesel and gasoline fuels in the road transport sector in Ghana using annual data from 1971 to 2011. First, we find that gasoline and diesel demand are both price inelastic in the short- run, but the income elasticity for the former is inelastic and elastic for the latter. There is evidence of a shift in the long-run price and income elasticities after the eighties. We find that these elasticities differ between diesel and gasoline. We show that government decision to withdraw fuel subsidies will increase the energy efficiency gap in the diesel sector more than the gasoline sector. Using the Structural Cointegration VAR, we also show that government intervention in pricing of petroleum products in the road sector seems to be politically and not economically driven. Further, shocks are more persistent for diesel than gasoline. Last, road diesel and gasoline consumption are expected to increase but slow down between 2020 and 2030 with a possible dieselization of the economy. These results have important implications for government fuel tax policy and investment commitment in the road sector.

An export demand equation estimation for Tunisia through an unobservable component model

This paper analysed the development of the external sector for Tunisia and its main competitors and quantified the dynamic contributions of the trade key determinants of export volumes behaviour. In addition to the traditional variables affecting export volumes, price and foreign demand, an unobservable time-varying component is involved in the export equations to capture the underlying non-price competitiveness. The structural modelling approach used within an error correction framework allows isolating the different trade fluctuations sources and assessing each variable contribution to export flows. The findings confirm the existence of stochastic trends, due to technical change and other exogenous factors, causing the export flows. Thus, the failure to take these trends into account would lead to biased long-run price elasticity estimates.

An export demand equation estimation for Tunisia through an unobservable component model

This paper analysed the development of the external sector for Tunisia and its main competitors and quantified the dynamic contributions of the trade key determinants of export volumes behaviour. In addition to the traditional variables affecting export volumes, price and foreign demand, an unobservable time-varying component is involved in the export equations to capture the underlying non-price competitiveness. The structural modelling approach used within an error correction framework allows isolating the different trade fluctuations sources and assessing each variable contribution to export flows. The findings confirm the existence of stochastic trends, due to technical change and other exogenous factors, causing the export flows. Thus, the failure to take these trends into account would lead to biased long-run price elasticity estimates.

The Price and Income Elasticities of Natural Gas Demand: International Evidence

Natural gas contributes a growing share of the world’s energy mix. In this paper we use national-level data for a sample of 44 countries to estimate the price and income elasticities of natural gas demand. We present both single-equation results and results instrumenting natural gas prices with proved natural gas reserves. Our instrument includes both domestic reserves and distance-weighted reserves in other countries. We obtain estimates of the average long-run price elasticity of natural gas demand of around –1.25 and of the average long-run income elasticity of natural gas demand of 1 and higher. We also present separate estimates for final natural gas demand by industry and households.

Determinants of Oil Demand in OECD Countries: An Application of Panel Data Model

This study aimed to analyze demand for oil in 20 selected OECD countries over the period 1980 to 2011, within the framework of panel data model. The long-run income and price elasticities of oil demand were computed and the Granger causality between variables of interest was tested. The results indicated that oil demand has positive and negative income and price elasticities, respectively. In addition, both income and price were inelastic in the long-run, but price elasticity was lower than income elasticity. Furthermore, a bidirectional causality running from economic growth to oil consumption and vice versa was obtained, providing evidence of feedback hypothesis. Based on these results, some crucial policy implications were suggested.

How price inelastic is demand for gasoline in fuel-subsidizing economies?

In recent years, governments that have historically subsidized domestic fuel consumption face an ever-growing challenge in maintaining fuel subsidies and have embarked on subsidy reform. This paper estimates the price and income elasticity of demand for gasoline in countries where fuel prices are government-subsidized. We make use of biennial panel road-sector data for 32 countries over the 1998–2010 period and find demand for gasoline to be price inelastic both in the short run and long run. We estimate the short-run price and income elasticities at −0.05 and 0.16 and the long-run price and income elasticities at −0.25 and 0.81, respectively. It is our contention that concerned governments should play an active role in identifying and committing to a road map to progressively abandoning fuel subsidies. They should also not be discouraged by relatively small consumption corrections in the short run. A reduction in subsidies can eventually release considerable amount of resources for more crucial and potentially growth-enhancing public services such as education and health.

Aggregate and regional demand for electricity in Malaysia

The main objective of this paper is the analysis of electricity consumption in Malaysia as a whole and its three regions, namely, Peninsular Malaysia, Sabah and Sarawak. This analysis has been carried out using distinguished data in sectoral level for 44 quarters (2000Q1-2010Q4). For this purpose, two log-log static and dynamic panel demand functions are estimated. The dynamic model, which is based on a partial adjustment approach, is used to compare with the static model. The aggregate and the three regional models are estimated based on their economic sectors in both the dynamic and static methods. This study seeks to reveal some features of electricity consumption in Malaysia and its regions. It is found that the short and long- run price elasticities of electricity demand in all regions of Malaysia are inelastic. Consumers’ responsiveness to changes in electricity prices in the short-run is low, while they have a high response to the long-run changes in the entire Malaysian economy and its regions. This means that, while the short and long-run price elasticities of electricity demand are lower than one, the magnitudes of the long-run elasticities are greater than the short-run elasticities. Moreover, all elasticities in the dynamic models are smaller than the static models. The estimated short and long-run cross-price elasticities of Liquefied Petroleum Gas (LPG) are negative which suggests that LPG and electricity are complementary goods.

The influence of price and non-price effects on demand for heating in the EU residential sector

This paper models energy demand for space and water heating from 1970 to 2005 in the residential sector of four EU countries (France, Italy, Sweden, and UK) using index decomposition, ARDL (autoregressive distributed lag) econometric models and cointegration analysis. The partial and temporal influences on energy demand in each country of the number of households, floor area per household (m2) and unit consumption for space and water heating (kWh/m2/year) are disaggregated. The long-run price elasticity of demand at the unit consumption level is found to be low (around −0.25 over the four countries) while the long-run income elasticity of floor area per household is found to be around 0.25 for Italy, Sweden and the UK but insignificant for France. In an exercise using the model to estimate demand to 2050 under annual increases in energy prices of between 0% and 3% it is found that non-price effects such as building codes and autonomous technical progress (represented in the model as a time trend) are equally or more important than the price effect in reducing demand. Thus achieving significant reductions in EU residential sector energy demand by 2050 would require additional non-price policies and measures for success.

Price and Income Elasticity of Indian Exports—The Role of Supply-Side Bottlenecks

This paper estimates the short-term and long-run price and income elasticity of Indian exports, and investigates the role of supply-side bottlenecks in shaping India’s export demand relationship. We use disaggregated export volume data for 45 Indian industries over the period 1990-2013, as well as industry-specific international relative prices, for estimation. Our results indicate that Indian exports are sensitive to international relative-price competitiveness, world demand, and energy shortages. In addition, binding supply-side constraints (notably energy shortages) dampen price responsiveness in the short-term.

Price and Income Elasticity of Indian Exports—The Role of Supply-Side Bottlenecks

This paper estimates the short-term and long-run price and income elasticity of Indian exports, and investigates the role of supply-side bottlenecks in shaping India’s export demand relationship. We use disaggregated export volume data for 45 Indian industries over the period 1990-2013, as well as industry-specific international relative prices, for estimation. Our results indicate that Indian exports are sensitive to international relative-price competitiveness, world demand, and energy shortages. In addition, binding supply-side constraints (notably energy shortages) dampen price responsiveness in the short-term.

House prices, housing development costs, and the supply of new single-family housing in German counties and cities

This paper investigates the determinants of new single-family housing supply in local housing markets in Germany, using construction permits as the dependent variable. The empirical estimations are based on a panel data-set for 413 German counties and cities spanning the time period of 2004–2010. Employing dynamic panel data analysis, the findings suggest that the local ratio of existing home prices to housing construction costs and past local permit rates act as important drivers of new local housing investment. The average long-run price elasticity of new single-family housing supply is considerably less than one, but sizeable differences exist across the urban hierarchy.

The cost of carbon dioxide abatement from state renewable portfolio standards

Renewable portfolio standards (RPSs) have become a popular tool for state governments to promote renewable electricity generation and to decrease carbon dioxide emissions within a state or region. Renewable portfolio standards are a policy tool likely to persist for many decades due to the long term goals of many state RPSs and the likely creation of a federal RPS alongside any comprehensive climate change bill. Even though RPSs have become a popular policy tool, there is little empirical evidence about their costs. Using the temporal and regional variation in RPS requirements, I estimate the long-run price elasticity of supply of renewable electricity generation to be 2.67 (95% CI of 1.74, 3.60). Using my preferred elasticity estimate, I calculate the marginal cost of abatement from RPSs is at least $11 per ton of CO2 compared to a marginal cost of abatement of $3 per ton in the Regional Greenhouse Gas Initiative.

Short- and long-run elasticities of electricity demand in the Korean service sector

This paper attempts to examine the electricity demand function in the Korean service sector using the annual data covering the period 1970–2011. The short- and long-run elasticities of electricity demand with respect to price and income are empirically estimated using a co-integration and error-correction model. The short- and long-run price elasticities are estimated to be −0.421 and −1.002, respectively. The short- and long-run income elasticities are computed to be 0.855 and 1.090, respectively. Electricity demand in the service sector is inelastic to changes in both price and income in the short-run, but elastic in the long-run. Therefore, it appears that a pricing policy is more effective than the direct regulation of reducing electricity demand in the long-run in order to stabilize the electricity demand in the service sector. Moreover, it is necessary to encourage a more efficient use of electricity to cope with increasing demand for electricity following economic growth because the electricity demand in the service sector is income-elastic in the long-run.

The demand for UK beer: estimates of the long-run on- and off-trade beer price elasticities

Over the last 30 years, UK beer sales have been falling while the market itself has experienced a dynamic shift from on-trade to off-trade sales. This article provides estimates of the long-run price, cross price and income elasticities, for both on- and off-trade beer consumption. The results shed light on the changing UK beer market, while also having different implications for imposing beer excise duties and the debate on a minimum price per unit for alcohol.

Determinants of VMT in Urban Areas:A Panel Study of 87 U.S. Urban Areas 1982-2009

This paper uses econometric techniques to examine the determinants of vehicle miles traveled (VMT) in a panel study using data from a cross section of 87 U.S. urban areas over the period 1982-2009. We use standard OLS regression as well as two-stage least squares techniques to examine the impact of factors such as urban density, lane-miles, per capita income, real fuel cost, transit mileage, and various industry mix variables on per capita VMT. We use a distributed lag model to estimate long-run elasticities and find that the long-run price elasticity of demand for per capita VMT is approximately five times larger than in the short run. Preliminary empirical results show the per capita demand for VMT in urban areas is positively and significantly impacted by lane miles, personal income, and the percent of employment in the construction and public sectors. Fuel price and transit use and the percent of employment in manufacturing, retail, and wholesale sectors are all found to be statistically significant and negatively related to VMT per capita. After correcting for endogeneity, urban population density exerts a negative, but not always statistically significant, impact on per capita VMT. Finally, per capita VMT is found to differ significantly by geographic region, being higher the more western and the larger the population size of an urban area.

Long-Run Price Elasticities of Demand for Credit: Evidence from a Countrywide Field Experiment in Mexico

The long-run price elasticity of demand for credit is a key parameter for intertemporal modeling, policy levers, and lending practice. We use randomized interest rates, offered across 80 regions by Mexico’s largest microlender, to identify a 29-month dollars-borrowed elasticity of -1.9. This elasticity increases from -1.1 in year one to -2.9 in year three. The number of borrowers is also elastic. Credit bureau data does not show evidence of crowd-out. Competitors do not respond by reducing rates, perhaps because Compartamos’ profits are unchanged. The results are consistent with multiple equilibria in loan pricing.

The price responsiveness of housing supply in OECD countries

The responsiveness of housing supply to changes in prices bears important implications for the evolution of housing prices and the speed of adjustment of housing markets. Based on a stock-flow model of the housing market estimated within an error correction framework, this paper estimates the long-run price elasticity of new housing supply in 21 OECD countries. Estimates suggest that the responsiveness of housing supply to price changes varies substantially across countries. It is relatively more flexible in North America and some Nordic countries, while it is more rigid in continental European countries and in the United Kingdom. The responsiveness of housing supply depends not only on national geographical and urban characteristics but also on policies, such as land use and planning regulations.