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Necessity or Luxury Good? Household Energy Spending and Income in Britain 1991-2007

In recent years, many households around the world have experienced reductions in real incomes and higher energy prices, both of which have important demand and welfare implications. A better understanding of the socio-economic determinants of household energy demand and spending is therefore important from a welfare perspective. This is particularly useful in the case of liberalised energy markets where there is a need to devise new and innovative energy policies for the residential sector. This paper explores British household spending on energy in total and on electricity and gas separately. As the relative importance of essential or luxury services of energy varies with income, we focus our analysis on this driver of energy spending and estimate Engel spending curves using static and dynamic models for a panel dataset comprising over 77,000 observations for the 1991-2007 period. The lack of household level price data is common in liberalized retail energy markets. This issue is addressed by a new modeling approach based on within and between differences in regional energy prices. We find that the Engel spending curves are S-shaped. Income elasticities for energy spending are, however, U-shaped and smaller than unity, suggesting that energy services are a necessity for households.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Natural Gas – Markets and Prices; Electricity – Markets and Prices ; Electricity – Policy and Regulation; Energy and the Economy – Energy as a Productive Input; Energy and the Economy –Economic Growth and Energy Demand; Energy and the Economy – Resource Endowments and Economic Performance; Energy and the Economy – Energy Shocks and Business Cycles

JEL Codes:
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
L13 - Oligopoly and Other Imperfect Markets
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
O13 - Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
Q34 - Natural Resources and Domestic and International Conflicts
F44 - International Business Cycles

Keywords: Household energy spending, Engel curves, Price modeling

DOI: 10.5547/01956574.34.4.6

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Published in Volume 34, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.