The intended and unintended consequences of large electricity subsidies: evidence from Mongolia

We investigate the effectiveness of large electricity subsidies to reduce the consumption of dirty energy and improve ambient air quality. We exploit a policy change in Mongolia that provides 50-100 percent subsidy to households in some regions, allowing us to use difference-in-differences models. Using five rounds of the Mongolia Household Socio-Economic Survey, we find that the subsidy reduces the likelihood of reporting illness. We further find that households receiving the electricity subsidy increase their (total of subsidised and un-subsidised) electricity expenditure by at least 17 percent more than those who have not received any such benefit. This is an important positive outcome, indicating that households changed their behavior of daytime and non-winter season electricity consumption, when they do not receive any subsidy. Policymakers, therefore, need to internalize the unintended benefit of the subsidy when comparing with the cost of the programme.