Market formation under fixed supply costs: The case of energy-efficient biomass stoves in Rwanda

Many technologies with substantial private and social benefits diffuse only slowly in low-income countries. Existing explanations typically focus on household demand and give little attention to the conditions under which markets for these technologies emerge. We study market formation for energy-efficient biomass cookstoves in rural Rwanda by combining experimental evidence on households' willingness to pay with detailed administrative data on the costs of supplying cookstoves. Randomized variation in stove prices identifies the willingness-to-pay schedule, while production and distribution cost data allow us to estimate the average cost of supplying cookstoves at different levels of market penetration. Comparing these two schedules shows that average supply costs remain above households' willingness to pay throughout the observed range of adoption. Decentralized markets are therefore unlikely to become commercially self-sustaining under prevailing conditions. Back-of-the-envelope welfare calculations suggest that the subsidy required to bridge this gap is justified by the climate benefits alone and may also be warranted by household time savings that are not fully reflected in the willingness to pay.