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Price elasticity of household fuel comsumption

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  • M. CLERC

    (Insee)

  • V. MARCUS

    (Insee)

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    Abstract

    The high levels reached by world oil prices and fuel prices in mid 2008 have raised notable concerns about the risk of future significant drops in household purchasing power. In the framework of a national strategy to reduce CO2 emissions, a tax reform on fossil fuels is also being studied. In this context, this paper aims to identify the categories of households that are most exposed to an energy-price increase and to assess the sensitivity of household consumption to changes in fuel prices and (to a lesser extent) in household energy prices. First, we estimate price elasticities using time series data from the French quarterly accounts. We, then, carry out a microeconomic analysis, which enables us to take the heterogeneity of consumer behaviour into account and to assess the impact of a price increase depending on the categories of households. We use individual consumption data from the 2006 "Consumer expenditure survey. The low price variability between households, which constitutes the main limitation of cross-section data, is circumvented by constructing personalised price indices for each surveyed household, following the Ruiz and Trannoy (2008) methodology. The estimated average price elasticities of demand to fuel prices derived from the time series data are significant, around 0.2 in the short run and 0.4 in the long run. The price elasticity estimates resulting from the micro approach are included in the range 0.7 - 1.0. The microeconomic analysis also shows that the households using their personal vehicles to go to work are less sensitive to higher fuel prices that those who do not use their cars for that purpose. Conversely, the difference in sensitivity between the least and most wealthy households appears to be quite low.

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    File URL: http://www.insee.fr/fr/publications-et-services/docs_doc_travail/G2009-08.pdf
    File Function: Document de travail de la DESE numéro G2009-08
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    Bibliographic Info

    Paper provided by Institut National de la Statistique et des Etudes Economiques, DESE in its series Documents de Travail de la DESE - Working Papers of the DESE with number g2009-08.

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    Date of creation: 2009
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    Handle: RePEc:crs:wpdeee:g2009-08

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    Related research

    Keywords: Budget share; price elasticity; demand system; redistributive effects; carbon tax;

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    References

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    1. Hickman, Bert G. & Lau, Lawrence J., 1973. "Elasticities of substitution and export demands in a world trade model," European Economic Review, Elsevier, vol. 4(4), pages 347-380, December.
    2. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
    3. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
    4. Josep Lluís Carrion-i-Silvestre & Andreu Sansó, 2005. "The KPSS Test with Two Structural Breaks," DEA Working Papers 13, Universitat de les Illes Balears, Departament d'Economía Aplicada.
    5. Puller, Steven L. & Greening, Lorna A., 1999. "Household adjustment to gasoline price change: an analysis using 9 years of US survey data," Energy Economics, Elsevier, vol. 21(1), pages 37-52, February.
    6. Nichele, Veronique & Robin, Jean-Marc, 1995. "Simulation of indirect tax reforms using pooled micro and macro French data," Journal of Public Economics, Elsevier, vol. 56(2), pages 225-244, February.
    7. Daniel J. Graham & Stephen Glaister, 2002. "The Demand for Automobile Fuel: A Survey of Elasticities," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 36(1), pages 1-25, January.
    8. Brannlund, Runar & Nordstrom, Jonas, 2004. "Carbon tax simulations using a household demand model," European Economic Review, Elsevier, vol. 48(1), pages 211-233, February.
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