Following the oil embargo in late 1973, a variety of programs were implemented to reduce the rate of increase of electricity consumption, including advertisements to inform consumers of the cost savings available through conservation measures.' Serious doubts have been raised concerning the likely effectiveness of such advertisements in reducing demand. Two basic issues lie at the heart of these doubts. First, since most of these advertising programs were administered by companies that supply electricity, it is difficult to see the incentive of these firms to cooperate in the administration of such programs. Second, no empirical evidence has yet been presented regarding the sensitivity of electricity demand to conservational advertising. Given this lack of evidence, some doubt exists whether demand responds to such efforts at all. Both of these issues are addressed in this paper. In Section 1I we present a simple theoretical model that demonstrates the conditions under which the regulated firm will have a profit incenRecently, considerable effort has been made to reduce the growth rate of electricity consumption in the residential sector through conservational advertising. This paper presents a simple theoretical model of the regulated firm's incentive to reduce the demand for its product through such advertising. An indirect test of this model is provided by estimating a residential electricitydemand equation with utility company advertising included as an independent variable. The empirical results support the theory. Moreover, they indicate that advertising is a statistically significant determinant of the level of electricity demand, but that the advertising elasticity of demand is quite low. * The authors wish to thank William Fox, Richard Tepel, and an anonymous referee for helpful comments on earlier drafts of this paper. At the same time, we alone are responsible for any errors that may remain. 1. Two such programs are the Residential Conservation Service of the U.S. Department of Energy, which performs home energy audits to inform consumers of the relatively more profitable measures available for reducing electricity use, and conservation advertising programs mandated in several states by public service commissions.