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Household Energy Demand and the Equity and Efficiency Aspects of Subsidy Reform in Indonesia

The proper design of price interventions in energy markets requires consideration of equity and efficiency effects. In this paper, budget survey data from 29,000 Indonesian households are used to estimate a demand system for five energy sources, which is identified by the spatial variation in unit values (expenditures divided by quantities). We correct for the various quality and measurement error biases that result when unit values are used as proxies for market prices. The price elasticities are combined with tax and subsidy rates to calculate the marginal social cost of price changes for each item. The results suggest that even with high levels of inequality aversion there is a case for reducing the large subsidies on kerosene in Indonesia, supporting the reforms that have been announced recently.

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File URL: ftp://mngt.waikato.ac.nz/RePEc/wai/econwp/0606.pdf
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Paper provided by University of Waikato, Department of Economics in its series Working Papers in Economics with number 06/06.

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Length: 28 pages
Date of creation: 01 Aug 2006
Date of revision:
Handle: RePEc:wai:econwp:06/06
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  1. Deaton, A., 1988. "Quality, Quantity, And Spatial Variation Of Price," Papers 30, World Bank - Living Standards Measurement.
  2. Deaton, A., 1990. "Price Elasticities From Surveys Data: Extensions And Indonesian Results," Papers 69, World Bank - Living Standards Measurement.
  3. David M. Newbery, 2005. "Why Tax Energy? Towards a More Rational Policy," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-40.
  4. Madden, David, 1996. "Marginal Tax Reform and the Specification of Consumer Demand Systems," Oxford Economic Papers, Oxford University Press, vol. 48(4), pages 556-67, October.
  5. Pitt, Mark M., 1985. "Equity, externalities and energy subsidies The case of kerosine in Indonesia," Journal of Development Economics, Elsevier, vol. 17(3), pages 201-217, April.
  6. Kunal Sen & Liesbet Steer, 2005. "Survey of recent developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 41(3), pages 279-304.
  7. Ahmad, Ehtisham & Stern, Nicholas, 1984. "The theory of reform and indian indirect taxes," Journal of Public Economics, Elsevier, vol. 25(3), pages 259-298, December.
  8. John Creedy, 1996. "Measuring Income Inequality," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 29(2), pages 236-246.
  9. Nicita, Alessandro, 2004. "Efficiency and equity of a marginal tax reform - income, quality, and price elasticities for Mexico," Policy Research Working Paper Series 3266, The World Bank.
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