IDEAS home Printed from https://ideas.repec.org/a/aea/aejpol/v4y2012i3p56-90.html
   My bibliography  Save this article

The Redistributional Impact of Nonlinear Electricity Pricing

Author

Listed:
  • Severin Borenstein

Abstract

Electricity regulators often mandate increasing-block pricing (IBP)—i.e., marginal price increases with the customer's average daily usage—to protect low-income households from rising costs. IBP has no cost basis, raising a classic conflict between efficiency and distributional goals. Combining household-level utility billing data with census data on income, I find that IBP in California results in modest wealth redistribution, but creates substantial deadweight loss relative to the transfers. I also show that a common approach to studying income distribution effects by using median household income within census block groups may be misleading. (JEL D31, L11, L51, L94, L98, Q41, Q48)

Suggested Citation

  • Severin Borenstein, 2012. "The Redistributional Impact of Nonlinear Electricity Pricing," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 56-90, August.
    • Handle: RePEc:aea:aejpol:v:4:y:2012:i:3:p:56-90
    Note: DOI: 10.1257/pol.4.3.56
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.4.3.56
    Download Restriction: no
    File URL: http://www.aeaweb.org/aej/pol/data/2010-0085_data.zip
    Download Restriction: no
    File URL: http://www.aeaweb.org/aej/pol/app/2010-0085_app.pdf
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Frank A. Scott, Jr., 1981. "Estimating Recipient Benefits and Waste from Lifeline Electricity Rates," Land Economics, University of Wisconsin Press, vol. 57(4), pages 536-543.
    2. Gibson, Michael & Price, Catherine, 1986. "Standing charge rebates Costs and benefits," Energy Policy, Elsevier, vol. 14(3), pages 262-271, June.
    3. Hastings, Justine S. & Kane, Thomas J. & Staiger, Douglas O., 2005. "Parental Preferences and School Competition: Evidence from a Public School Choice Program," Working Papers 10, Yale University, Department of Economics.
    4. Sanford V. Berg & William E. Roth, 1976. "Some Remarks on Residential Electricity Consumption and Social Rate Restructuring," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 690-698, Autumn.
    5. Michael Hennessy, 1984. "The Evaluation of Lifeline Electricity Rates," Evaluation Review, , vol. 8(3), pages 327-346, June.
    6. Meghan Busse & Jorge Silva-Risso & Florian Zettelmeyer, 2006. "$1,000 Cash Back: The Pass-Through of Auto Manufacturer Promotions," American Economic Review, American Economic Association, vol. 96(4), pages 1253-1270, September.
    7. Herriges, Joseph A & King, Kathleen Kuester, 1994. "Residential Demand for Electricity under Inverted Block Rates: Evidence from a Controlled Experiment," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 419-430, October.
    8. Snow, Arthur & Warren, Ronald Jr., 1996. "The marginal welfare cost of public funds: Theory and estimates," Journal of Public Economics, Elsevier, vol. 61(2), pages 289-305, August.
    9. Herriges, Joseph A. & King, K.A., 1994. "Residential Demand for Electricity Under Block Rate Structures: Evidence from a Controlled Experiment," Staff General Research Papers Archive 1498, Iowa State University, Department of Economics.
    10. Wodon, Quentin & Ajwad, Mohamed Ishan & Siaens, Corinne, 2003. "Lifeline or Means-Testing? Electric Utility Subsidies in Honduras," MPRA Paper 15419, University Library of Munich, Germany.
    11. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September.
    12. Michael Hennessy & Dennis M. Keane, 1989. "Lifeline Rates in California," Evaluation Review, , vol. 13(2), pages 123-140, April.
    13. Penelope J. Brook & Timothy C. Irwin, 2003. "Infrastructure for Poor People : Public Policy for Private Provision," World Bank Publications - Books, The World Bank Group, number 15159, December.
    14. Lester D. Taylor, 1975. "The Demand for Electricity: A Survey," Bell Journal of Economics, The RAND Corporation, vol. 6(1), pages 74-110, Spring.
    15. Catherine Waddams & Ruth Hancock, 1998. "Distributional effects of liberalising UK residential utility markets," Fiscal Studies, Institute for Fiscal Studies, vol. 19(3), pages 295-319, August.
    16. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    17. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-563, February.
    18. Brian A. Jacob & Lars Lefgren, 2007. "What Do Parents Value in Education? An Empirical Investigation of Parents' Revealed Preferences for Teachers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(4), pages 1603-1637.
    19. Baum-Snow, Nathaniel & Marion, Justin, 2009. "The effects of low income housing tax credit developments on neighborhoods," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 654-666, June.
    20. Patrick Bajari & Matthew E. Kahn, 2008. "Estimating Hedonic Models of Consumer Demand with an Application to Urban Sprawl," Springer Books, in: Andrea Baranzini & José Ramirez & Caroline Schaerer & Philippe Thalmann (ed.), Hedonic Methods in Housing Markets, chapter 6, pages 129-155, Springer.
    21. Andrea Baranzini & José Ramirez & Caroline Schaerer & Philippe Thalmann (ed.), 2008. "Hedonic Methods in Housing Markets," Springer Books, Springer, number 978-0-387-76815-1, September.
    22. Ted Gayer & James T. Hamilton & W. Kip Viscusi, 2000. "Private Values Of Risk Tradeoffs At Superfund Sites: Housing Market Evidence On Learning About Risk," The Review of Economics and Statistics, MIT Press, vol. 82(3), pages 439-451, August.
    23. Dionissis Dimopoulos, 1981. "Pricing Schemes for Regulated Enterprises and Their Welfare Implications in the Case of Electricity," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 185-200, Spring.
    24. Shin, Jeong-Shik, 1985. "Perception of Price When Price Information Is Costly: Evidence from Residential Electricity Demand," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 591-598, November.
    25. Giles Burgess & Morton Paglin, 1981. "Lifeline Electricity Rates as an Income Transfer Device," Land Economics, University of Wisconsin Press, vol. 57(1), pages 41-47.
    26. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
    27. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes : General equilibrium analyses," Other publications TiSEM 5d4b7517-c5c8-4ef6-ab76-3, Tilburg University, School of Economics and Management.
    28. Martin S. Feldstein, 1972. "Equity and Efficiency in Public Sector Pricing: The Optimal Two-Part Tariff," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 86(2), pages 175-187.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fell, Harrison & Li, Shanjun & Paul, Anthony, 2014. "A new look at residential electricity demand using household expenditure data," International Journal of Industrial Organization, Elsevier, vol. 33(C), pages 37-47.
    2. Pavanini, Nicola & Feger, Fabian & Radulescu, Doina, 2017. "Welfare and Redistribution in Residential Electricity Markets with Solar Power," CEPR Discussion Papers 12517, C.E.P.R. Discussion Papers.
    3. Çetinkaya, Murat & Başaran, Alparslan A. & Bağdadioğlu, Necmiddin, 2015. "Electricity reform, tariff and household elasticity in Turkey," Utilities Policy, Elsevier, vol. 37(C), pages 79-85.
    4. Radulescu, Doina & Pavanini, Nicola & Feger, Fabian, 2016. "Welfare and Redistribution Effects of Alternative Tariffs in Energy Markets with Solar Power," VfS Annual Conference 2016 (Augsburg): Demographic Change 145669, Verein für Socialpolitik / German Economic Association.
    5. Marta Suárez-Varela & Roberto Martínez-Espiñeira, 2018. "A proposal for the analysis of price escalation within water tariffs: The impact of the Water Framework Directive in Spain," Environment and Planning C, , vol. 36(4), pages 726-749, June.
    6. Pizer, William A. & Kopp, Raymond, 2005. "Calculating the Costs of Environmental Regulation," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 25, pages 1307-1351, Elsevier.
    7. Parry, Ian W.H., 2002. "Adjusting Carbon Cost Analyses to Account for Prior Tax Distortions," Discussion Papers 10481, Resources for the Future.
    8. Charles F. Mason, 2018. "Optimal Contracts for Discouraging Deforestation with Risk Averse Agents," CESifo Working Paper Series 7067, CESifo.
    9. Alberini, Anna & Bezhanishvili, Levan & Ščasný, Milan, 2022. "“Wild” tariff schemes: Evidence from the Republic of Georgia," Energy Economics, Elsevier, vol. 110(C).
    10. Ian W.H. Parry & Antonio M. Bento, 2002. "Tax Deductions, Environmental Policy, and the "Double Dividend" Hypothesis," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 22, pages 397-426, Edward Elgar Publishing.
    11. Ian W.H. Parry, 2002. "A Second-Best Analysis of Environmental Subsidies," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 28, pages 555-572, Edward Elgar Publishing.
    12. Dalton, Christina M., 2014. "Estimating demand elasticities using nonlinear pricing," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 178-191.
    13. Kiran B Krishnamurthy, Chandra & Kriström, Bengt, 2013. "A cross-country analysis of residential electricity demand in 11 OECD-countries," CERE Working Papers 2013:5, CERE - the Center for Environmental and Resource Economics, revised 30 Jun 2014.
    14. Fullerton Jr., Thomas M. & Macias, David R. & Walke, Adam G., 2016. "Residential Electricity Demand in El Paso," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 46(2), December.
    15. Kussel, Gerhard & Frondel, Manuel, 2016. "Switching Response to Power Prices: Evidence from German Households," VfS Annual Conference 2016 (Augsburg): Demographic Change 145728, Verein für Socialpolitik / German Economic Association.
    16. Wu, Ya & Zhang, Li, 2017. "Evaluation of energy saving effects of tiered electricity pricing and investigation of the energy saving willingness of residents," Energy Policy, Elsevier, vol. 109(C), pages 208-217.
    17. Severin Borenstein & Lucas W. Davis, 2012. "The Equity and Efficiency of Two-Part Tariffs in U.S. Natural Gas Markets," Journal of Law and Economics, University of Chicago Press, vol. 55(1), pages 75-128.
    18. Shun-ichiro Bessho & Masayoshi Hayashi, 2013. "Estimating the Social Marginal Cost of Public Funds," Public Finance Review, , vol. 41(3), pages 360-385, May.
    19. Frank T. Denton & Dean C. Mountain & Byron G. Spencer, 2003. "Energy Demand with Declining Rate Schedules: An Econometric Model for the U.S. Commercial Sector," Land Economics, University of Wisconsin Press, vol. 79(1), pages 86-105.
    20. Lin, Boqiang & Chen, Xing, 2018. "Is the implementation of the Increasing Block Electricity Prices policy really effective?--- Evidence based on the analysis of synthetic control method," Energy, Elsevier, vol. 163(C), pages 734-750.

    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. The Redistributional Impact of Nonlinear Electricity Pricing (American Economic Journal: Economic Policy 2012) in ReplicationWiki

    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:4:y:2012:i:3:p:56-90. 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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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.