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Welfare Effects of Nonlinear Electricity Pricing

Abstract:
Block pricing is widespread among electricity and water utilities to protect low-income households and to encourage energy conservation through higher marginal prices. However, whether a block pricing system achieves those objectives is controversial. In this article, we analyze the impact of alternative electricity pricing systems on the welfare of consumers for the case of residential electricity block pricing in Korea. To do this, we first develop a theoretical model to compute each household's welfare change under alternative pricing systems. Then, we estimate the residential electricity demand function and compute every household's electricity consumption and expenses under alternative pricing systems. Finally, we compute each household's welfare change and social welfare to draw policy implications. Keywords: Blocking pricing, Electricity demand estimation, Welfare change, Equivalent variation, Price regulation

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Energy Specializations: Natural Gas – Markets and Prices; Nuclear Power – Markets and Prices; Energy and the Economy – Other; Electricity – Other; Electricity – Generation Technologies; Electricity – Markets and Prices

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
Q49 - Energy: Other
Q2 -
D42 - Market Structure, Pricing, and Design: Monopoly

Keywords: Blocking pricing, Electricity demand estimation, Welfare change, Equivalent variation, Price regulation

DOI: 10.5547/01956574.38.1.jyou

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Published in Volume 38, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.