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The Redistributional Impact of Nonlinear Electricity Pricing

  • Severin Borenstein

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)

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Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 4 (2012)
Issue (Month): 3 (August)
Pages: 56-90

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Handle: RePEc:aea:aejpol:v:4:y:2012:i:3:p:56-90
Note: DOI: 10.1257/pol.4.3.56
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  1. Lester D. Taylor, 1975. "The Demand for Electricity: A Survey," Bell Journal of Economics, The RAND Corporation, vol. 6(1), pages 74-110, Spring.
  2. 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 537-63, February.
  3. Charles L. Ballard & Don Fullerton, 1990. "Distortionary Taxes and the Provision of Public Goods," NBER Working Papers 3506, National Bureau of Economic Research, Inc.
  4. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
  5. Brian A. Jacob & Lars Lefgren, 2005. "What Do Parents Value in Education? An Empirical Investigation of Parents' Revealed Preferences for Teachers," NBER Working Papers 11494, National Bureau of Economic Research, Inc.
  6. 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 591-98, November.
  7. 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.
  8. 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 419-30, October.
  9. Gibson, Michael & Price, Catherine, 1986. "Standing charge rebates Costs and benefits," Energy Policy, Elsevier, vol. 14(3), pages 262-271, June.
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