Interfuel substitution in the consumption of energy in the United States
Author(s)Baughman, Martin Lynn; Joskow, Paul L.; Zerhoot, Frederick S.
The effects of alternative public policies on the consumption and prices of various forms of energy in the United States depends critically on the nature of consumer demands for fuels and the supply characteristics of these fuels. Previous work on energy demand has tended to concentrate on the demand for a particular fuel as determined by standard economic variables such as the price of the fuel, income levels, sometimes the price of alternative fuels, and other demographic characteristics of the consuming population. In this work the consumer decision making process is viewed as being composed of two steps. First, the consumer decides that he wants a particular service and, secondly, seeks to find the fuel that will provide this service most cheaply. This view leads us to concentrate on substitution possibilities among fuels for particular services rather than own-price elasticities for a particular fuel. This paper presents results for the determinants of energy consumption in the residential and commercial sector in the United States. First, a discussion of the conceptual model used for fuel choice decisions is presented. Then, empirical results are given for appliance choices in the residential sector for four selected appliances and for the "fuel-split" of aggregate energy consumption among the three fuels used in the residential and commercial sector. The own-price and cross-price elasticities are estimated and discussed. Next, the paper discusses the determinants of total energy demand in the residential and commercial sector and presents empirical results for a simple flow adjustment model. The long run price elasticity of total demand in this sector is estimated to be about -0.5 while the short run (one year) value is -0.15. Finally, the estimated relationships are used to make projections to 1980 for alternative price scenarios. These results show that significant consumption responses to changing fuel prices can be expected and, further, that some states are much more dramatically impacted than others.
MIT Energy Lab
Energy policy in United States
The following license files are associated with this item: