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Sectoral Interfuel Substitution in Canada: An Application of NQ Flexible Functional Forms

Abstract:
This paper focuses on the aggregate demand for electricity, natural gas, and light fuel oil in Canada as a whole and six of its provinces - Quebec, Ontario, Manitoba, Saskatchewan, Alberta, and British Columbia - in the residential, commercial, and industrial sectors. We employ the locally flexible normalized quadratic (NQ) expenditure function (in the case of the residential sector) and the NQ cost function (in the case of the commercial and industrial sectors), treat the curvature property as a maintained hypothesis, and provide evidence consistent with neoclassical microeconomic theory. We find that the Morishima interfuel elasticities of substitution are in general positive and statistically significant. Our results indicate limited substitutability between electricity and natural gas, but strong substitutability between light fuel oil and each of electricity and natural gas in most cases.

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Energy Specializations: Natural Gas – Policy and Regulation; Petroleum – Markets and Prices for Crude Oil and Products; Electricity – Markets and Prices ; Energy Modeling – Energy Data, Modeling, and Policy Analysis; Energy and the Economy – Energy as a Productive Input

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

Keywords: Flexible functional forms, NQ expenditure function, NQ cost function, Global concavity

DOI: 10.5547/01956574.37.2.ajad

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Published in Volume 37, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.