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Energy-Capital Substitution: A General Equilibrium Analysis

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  • Chichilnisky, Graciela
  • Heal, Geoffrey

Abstract

We consider an economy which imports energy from a monopolistic price-setter. The domestic general equilibrium of this economy adjusts in response to the price of energy. We define the total cross price elasticity of demand between energy and capital as the cross price elasticity across general equilibria of the economy, as the equilibrium changes in response to energy price changes. This corresponds to the price elasticity given by a total demand curve, and incorporates adjustments on both supply and demand sides. It is shown that whether this total elasticity implies energy-capital complementarity or substitutability depends upon the parameters of the model and the price of energy: for a given model, there may be a change from substitutability to complementarity as the price of energy rises. This framework offers an additional way of reconciling apparently conflicting findings on energy-capital complementarity and substitutability: an earlier suggestion was made by Berndt and Wood (1979). It is a natural extension of the general equilibrium approach initiated by Hogan (1977).

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8329.

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Date of creation: 1993
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Handle: RePEc:pra:mprapa:8329

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Related research

Keywords: price elasticity; substitutability; complementarity; energy; energy prices; general equilibrium; monopoly;

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References

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  1. Berry, R. Stephen & Salamon, Peter & Heal, Geoffrey, 1978. "On a relation between economic and thermodynamic optima," Resources and Energy, Elsevier, vol. 1(2), pages 125-137, October.
  2. Berndt, Ernst R & Wood, David O, 1979. "Engineering and Econometric Interpretations of Energy-Capital Complementarity," American Economic Review, American Economic Association, vol. 69(3), pages 342-54, June.
  3. Griffin, James M & Gregory, Paul R, 1976. "An Intercountry Translog Model of Energy Substitution Responses," American Economic Review, American Economic Association, vol. 66(5), pages 845-57, December.
  4. Frank Hahn, 2010. "Exercises in Conjectural Equilibrium," Levine's Working Paper Archive 526, David K. Levine.
  5. Akerlof, George A. & Burmeister, Edwin, 1970. "Substitution in a general equilibrium framework," Journal of Economic Theory, Elsevier, vol. 2(4), pages 411-422, December.
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Cited by:
  1. Thompson, Henry, 2006. "The applied theory of energy substitution in production," Energy Economics, Elsevier, vol. 28(4), pages 410-425, July.
  2. Chichilnisky, Graciela, 1986. "Trade and development in the 1980s," MPRA Paper 8035, University Library of Munich, Germany.
  3. Hokky Situngkir, 2004. "Inequality And Oil Subsidy In Indonesia," Macroeconomics 0405004, EconWPA.

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