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The Redistributional Impact of Nonlinear Electricity Pricing

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  • 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
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Vesterberg, Mattias, 2017. "The effect of price on electricity contract choice," Umeå Economic Studies 941, Umeå University, Department of Economics.
    2. repec:eee:enepol:v:109:y:2017:i:c:p:782-793 is not listed on IDEAS
    3. 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.
    4. Ali Hortaçsu & Seyed Ali Madanizadeh & Steven L. Puller, 2015. "Power to Choose? An Analysis of Consumer Inertia in the Residential Electricity Market," NBER Working Papers 20988, National Bureau of Economic Research, Inc.
    5. repec:eee:enepol:v:114:y:2018:i:c:p:591-597 is not listed on IDEAS
    6. S. Borenstein, 2013. "Effective and Equitable Adoption of Opt-In Residential Dynamic Electricity Pricing," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 42(2), pages 127-160, March.
    7. Vesterberg, Mattias, 2017. "Heterogeneity in price responsiveness of electricity: Contract choice and the role of media coverage," Umeå Economic Studies 940, Umeå University, Department of Economics.
    8. Lucas W. Davis & Erich Muehlegger, 2010. "Do Americans consume too little natural gas? An empirical test of marginal cost pricing," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 791-810.
    9. repec:eee:enepol:v:106:y:2017:i:c:p:255-265 is not listed on IDEAS
    10. Miravete, Eugenio J & Seim, Katja & Thurk, Jeff, 2013. "Complexity, Efficiency, and Fairness of Multi-Product Monopoly Pricing," CEPR Discussion Papers 9641, C.E.P.R. Discussion Papers.
    11. Koichiro Ito, 2015. "Asymmetric Incentives in Subsidies: Evidence from a Large-Scale Electricity Rebate Program," American Economic Journal: Economic Policy, American Economic Association, vol. 7(3), pages 209-237, August.
    12. Farrell, Niall & Lyons, Seán, 2014. "The distributional impact of the Irish public service obligation levy on electricity consumption," MPRA Paper 53488, University Library of Munich, Germany.
    13. Lanot, Gauthier & Vesterberg, Mattias, 2017. "An empirical model of the decision to switch between electricity price contracts," Umeå Economic Studies 951, Umeå University, Department of Economics.
    14. repec:eee:enepol:v:109:y:2017:i:c:p:208-217 is not listed on IDEAS
    15. Khanna, Nina Zheng & Guo, Jin & Zheng, Xinye, 2016. "Effects of demand side management on Chinese household electricity consumption: Empirical findings from Chinese household survey," Energy Policy, Elsevier, vol. 95(C), pages 113-125.
    16. Steven W. Hemelt & Kevin M. Stange, 2014. "Marginal Pricing and Student Investment in Higher Education," NBER Working Papers 20779, National Bureau of Economic Research, Inc.
    17. Nauges, Celine & Whittington, Dale, 2017. "Evaluating the Performance of Alternative Municipal Water Tariff Designs: Quantifying the Tradeoffs between Equity, Economic Efficiency, and Cost Recovery," World Development, Elsevier, vol. 91(C), pages 125-143.
    18. Hancevic, Pedro & Cont, Walter & Navajas, Fernando, 2016. "Energy populism and household welfare," Energy Economics, Elsevier, vol. 56(C), pages 464-474.
    19. Severin Borenstein, 2015. "The Private Net Benefits of Residential Solar PV: The Role of Electricity Tariffs, Tax Incentives and Rebates," NBER Working Papers 21342, National Bureau of Economic Research, Inc.
    20. Mar Reguant, 2018. "The Efficiency and Sectoral Distributional Implications of Large-Scale Renewable Policies," NBER Working Papers 24398, National Bureau of Economic Research, Inc.
    21. Radulescu, Doina & Pavanini, Nicola & Feger, Fabian, 2016. "Welfare and Redistribution Effects of Alternative Tariffs in Energy Markets with Solar Power," Annual Conference 2016 (Augsburg): Demographic Change 145669, Verein für Socialpolitik / German Economic Association.

    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

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