What is the best proxy for energy price in a country if country's energy price is subsidized? Can Subsidized price be used in estimating energy demand function?
Regarding your last question, the answer is yes. If you are interested in, for instance, how households respond to changes in energy prices you will want to use the price that they are actually paying. It may however sometimes be a good idea to include the market price and the subsidy separately since households may respond to changes in these differently (e.g. due to signalling effects).
Regards, Patrik
Can I use CPI price of energy( derive from disaggregation of CPI ) as a proxy for energy price?
Thank for your earlier explanation and answer.
The price of energy is what consumer pays for it. There exists demand function for energy in each country, and we are in the point corresponding to regulated price. If you know this demand, you can derive how much more energy is consumed comparing to unregulated case.
Many countries (like EU) have huge tax on gasoline. It also perturbs the market but in a different way; it lowers energy use. Apart from tax collection this can be good for less carbon emissions. Still, energy demand is relatively inelastic; people do not cut their travel by 50% if energy price doubles after tax.
In principle, some subsidy in net exporting country can sometimes be useful. For example, it helps poor people to afford travel and not to lose link with their family members living apart. The main question is about economic efficiency of that subsidy. To my mind, most oil producing countries in the Middle East have too high subsidy on domestic gasoline; it has no economic but only political justification (votes). At the same time I am surprised by tax and no subsidy in Brazil (produces not only oil but also a lot of bio-fuels) where cheaper gasoline can stimulate higher regional integration of this vast territory.
P.S. Regarding your last question: CPI is relative change in price comparing to the previous period.; it can be useful for inflation calculation but cannot be used as proxy for price itself.
In the case of unavailability of data on national energy prices, You can use a proxy of real energy price variable which is constructed by deflating for example the price of Dubai spot crude oil (measured in US dollars per barrel) to the your country's consumer price index (2005 = 100).
It depends on what you want to do with it. If you're estimating a demand function for a final product, just use the subsidized price at the pump, including taxes. If you want to know the real resource cost to the country, I agree with Mounir Belloumi, that you want the external price, but I would also add transportation costs . . . but if energy prices aren't available, I doubt transportation cost information would be available either, but you should be able to research that subject based on mileage.
Your question may be too broad for a single answer. "Energy" covers a lot of territory. If by "energy" you mean transportation fuels, then subsidized or highly taxed prices that the consumer actually faces are often the "right" prices to use, but even then a NATIONAL aggregate price may not be appropriate.
If by "energy" you are speaking of electricity prices, then one ought to look at a lot more than an average price - whether subsidized, highly taxed, or actually representing an average price the consumer sector of interest faces. Besides the basic monthly charge that occurs regardless of how much electricity is used, most electric utility billing schemes include tiers such that the rate changes depending upon how much is used in a month, demand charges depending upon the peak demand from that customer, and seasonal adjustments. Any of these can make the average price somewhat meaningless in a regression against consumers' demand, but all of them combined can make the question entirely meaningless.
if country's energy price is subsidized due to which factors this is happening? substitute products whose cost are rising then their price should be marked as proxy price to energy in market language.
Can I use Energy consumption as a proxy for technology or technological development? Could you suggest some articles as well?
Dear Ashish, there is high correlation between growth in energy consumption and economic growth, but only in developing economies. OECD countries grow now without increase of energy consumption due to investment in energy saving technologies and primary development of hi tech sectors with low energy intensity.
- Badges
- Science topic
- Similar topics
- Physical Sciences
- Energy