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Household Energy Demand and the Equity and Efficiency Aspects of Subsidy Reform in Indonesia

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  • Susan Olivia
  • John Gibson

Abstract

The proper design of price interventions in energy markets requires consideration of equity and efficiency effects. In this paper, budget survey data from 29,000 Indonesian households are used to estimate a demand system for five energy sources, which is identified by the spatial variation in unit values (expenditures divided by quantities). We correct for the various quality and measurement error biases that result when unit values are used as proxies for market prices. The price elasticities are combined with tax and subsidy rates to calculate the marginal social cost of price changes for each item. The results suggest that even with high levels of inequality aversion there is a case for reducing the large subsidies on kerosene in Indonesia, supporting the reforms that have been announced recently.

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Bibliographic Info

Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 29 (2008)
Issue (Month): Number 1 ()
Pages: 21-40

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Handle: RePEc:aen:journl:2008v29-01-a02

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References

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  1. David M. Newbery, 2005. "Why Tax Energy? Towards a More Rational Policy," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-40.
  2. Kunal Sen & Liesbet Steer, 2005. "Survey of recent developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 41(3), pages 279-304.
  3. Ahmad, Ehtisham & Stern, Nicholas, 1984. "The theory of reform and indian indirect taxes," Journal of Public Economics, Elsevier, vol. 25(3), pages 259-298, December.
  4. Deaton, A., 1988. "Quality, Quantity, And Spatial Variation Of Price," Papers 30, World Bank - Living Standards Measurement.
  5. Nicita, Alessandro, 2004. "Efficiency and equity of a marginal tax reform - income, quality, and price elasticities for Mexico," Policy Research Working Paper Series 3266, The World Bank.
  6. Madden, David, 1996. "Marginal Tax Reform and the Specification of Consumer Demand Systems," Oxford Economic Papers, Oxford University Press, vol. 48(4), pages 556-67, October.
  7. Deaton, Angus, 1990. "Price elasticities from survey data : Extensions and Indonesian results," Journal of Econometrics, Elsevier, vol. 44(3), pages 281-309, June.
  8. Pitt, Mark M., 1985. "Equity, externalities and energy subsidies The case of kerosine in Indonesia," Journal of Development Economics, Elsevier, vol. 17(3), pages 201-217, April.
  9. John Creedy, 1996. "Measuring Income Inequality," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 29(2), pages 236-246.
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Cited by:
  1. Arthur, Maria de Fátima S.R. & Bond, Craig A. & Willson, Bryan, 2012. "Estimation of elasticities for domestic energy demand in Mozambique," Energy Economics, Elsevier, vol. 34(2), pages 398-409.
  2. Park, Hojeong & Kwon, Hyucksoo, 2011. "Effects of consumer subsidy on household fuel switching from coal to cleaner fuels: A case study for anthracites in Korea," Energy Policy, Elsevier, vol. 39(3), pages 1687-1693, March.
  3. Mathew Adagunodo, 2013. "Petroleum Products Pricing Reform in Nigeria: Welfare Analysis from Household Budget Survey," International Journal of Energy Economics and Policy, Econjournals, vol. 3(4), pages 459 - 472.
  4. Rao, Narasimha D., 2013. "Distributional impacts of climate change mitigation in Indian electricity: The influence of governance," Energy Policy, Elsevier, vol. 61(C), pages 1344-1356.
  5. Ngui, Dianah & Mutua, John & Osiolo, Hellen & Aligula, Eric, 2011. "Household energy demand in Kenya: An application of the linear approximate almost ideal demand system (LA-AIDS)," Energy Policy, Elsevier, vol. 39(11), pages 7084-7094.

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