IDEAS home Printed from https://ideas.repec.org/a/aea/aejpol/v12y2020i3p433-61.html
   My bibliography  Save this article

Misunderstanding Nonlinear Prices: Evidence from a Natural Experiment on Residential Electricity Demand

Author

Listed:
  • Blake Shaffer

Abstract

This paper examines how consumers respond to nonlinear prices. Exploiting a natural experiment with electricity consumers in British Columbia, I find evidence that some households severely misunderstand nonlinear prices—incorrectly perceiving that the marginal price applies to all consumption, not simply the last unit. While small in number, the exaggerated responses by these households have a large effect in aggregate, masking an otherwise predominant response to average price. Largely unexplored in the literature, this type of misunderstanding has important economic, policy, and methodological implications beyond electricity markets. I estimate the welfare loss for these households to be the equivalent of 10 percent of annual electricity expenditure.

Suggested Citation

  • Blake Shaffer, 2020. "Misunderstanding Nonlinear Prices: Evidence from a Natural Experiment on Residential Electricity Demand," American Economic Journal: Economic Policy, American Economic Association, vol. 12(3), pages 433-461, August.
    • Handle: RePEc:aea:aejpol:v:12:y:2020:i:3:p:433-61
    DOI: 10.1257/pol.20180061
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/pol.20180061
    Download Restriction: no
    File URL: https://doi.org/10.3886/E111481V1
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/pol.20180061.appx
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/pol.20180061.ds
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    File URL: https://libkey.io/10.1257/pol.20180061?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Borenstein, Severin & Bushnell, James, 2021. "Issues, Questions, and a Research Agenda for the Role of Pricing in Residential Electrification," RFF Working Paper Series 21-35, Resources for the Future.
    2. Robert W. Hahn & Robert D. Metcalfe, 2021. "Efficiency and Equity Impacts of Energy Subsidies," American Economic Review, American Economic Association, vol. 111(5), pages 1658-1688, May.
    3. Arnold, Fabian & Jeddi, Samir & Sitzmann, Amelie, 2022. "How prices guide investment decisions under net purchasing — An empirical analysis on the impact of network tariffs on residential PV," Energy Economics, Elsevier, vol. 112(C).
    4. Schaufele, Brandon, 2021. "Lessons from a utility-sponsored revenue neutral electricity conservation program," Energy Policy, Elsevier, vol. 150(C).
    5. Joseph,George & Ayling,Sophie Charlotte Emi & Miquel-Florensa,Pepita & Bejarano,Hernán D. & Cardona,Alejandra Quevedo, 2021. "Behavioral Insights in Infrastructure Sectors : A Survey," Policy Research Working Paper Series 9704, The World Bank.
    6. Hindriks, Jean & Serse, Valerio, 2022. "The incidence of VAT reforms in electricity markets: Evidence from Belgium," International Journal of Industrial Organization, Elsevier, vol. 80(C).
    7. Smith, Steven M., 2022. "The effects of individualized water rates on use and equity," Journal of Environmental Economics and Management, Elsevier, vol. 114(C).
    8. Ferrasse, Jean-Henry & Neerunjun, Nandeeta & Stahn, Hubert, 2022. "Intermittency and electricity retailing: An incomplete market approach," Mathematical Social Sciences, Elsevier, vol. 120(C), pages 24-36.
    9. Jeffrey Wagner, 2021. "Optimal deterrence under misperception of the probability of apprehension and the magnitude of sanctions," Economics Bulletin, AccessEcon, vol. 41(3), pages 2080-2088.
    10. Yabin Da & Bin Zeng & Jing-Li Fan & Jiawei Hu & Lanlan Li, 2023. "Heterogeneous responses to climate: evidence from residential electricity consumption," Climatic Change, Springer, vol. 176(8), pages 1-19, August.
    11. Phuong Ho, 2023. "Nonlinear pricing, biased consumers, and regulatory policy," Journal of Economics, Springer, vol. 138(2), pages 149-164, March.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aejpol:v:12:y:2020:i:3:p:433-61. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.