IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v34y2012i2p419-425.html
   My bibliography  Save this article

Measuring the welfare effects of reducing a subsidy on a commodity using micro-models: An application to Kuwait's residential demand for electricity

Author

Listed:
  • BuShehri, Mahmoud A.M.
  • Wohlgenant, Michael K.

Abstract

This paper provides a conceptual and empirical approach for evaluating the direct benefits and costs that are associated with reforming the price of a subsidized commodity using a micro-model. The welfare analysis is based on two alternative scenarios, a hypothetical percentage increase in the price of the commodity and a hypothetical percentage decrease in the amount of subsidy. The latter is considered to be a simultaneous problem in which the exact price of the commodity that reduces consumption, and subsequently the subsidy to the specific target level needs to be determined first. As a case study, the paper utilizes the most recent Household Expenditure Survey in the State of Kuwait to estimate residential electricity demand for different household groups (i.e., low-, middle-, and high-income), and employs a partial equilibrium model to measure the welfare implications that may result from a reduction in the electricity subsidy rates. The empirical findings show that a small increase in the price of electricity would reduce annual consumption by 4741millionkWh and annual subsidy by US$734 million. The results also show that the loss in consumers’ welfare is approximately US$145 million, while the financial and environmental benefits to the society ranges between US$658 million and US$889 million. The magnitude of these welfare gains suggests that electricity price reforms combined with a rebate scheme to compensate households for their welfare loss, offsetting any political resistance to reform, is a win-win situation.

Suggested Citation

  • BuShehri, Mahmoud A.M. & Wohlgenant, Michael K., 2012. "Measuring the welfare effects of reducing a subsidy on a commodity using micro-models: An application to Kuwait's residential demand for electricity," Energy Economics, Elsevier, vol. 34(2), pages 419-425.
    • Handle: RePEc:eee:eneeco:v:34:y:2012:i:2:p:419-425
    DOI: 10.1016/j.eneco.2011.08.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988311001617
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2011.08.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. John Creedy, 2001. "Indirect tax reform and the role of exemptions," Fiscal Studies, Institute for Fiscal Studies, vol. 22(4), pages 457-486., December.
    2. R. A. Bewley, 1982. "On the Functional Form of Engel Curves: The Australian Household Expenditure Survey 1975–76," The Economic Record, The Economic Society of Australia, vol. 58(1), pages 82-91, March.
    3. Kamerschen, David R. & Porter, David V., 2004. "The demand for residential, industrial and total electricity, 1973-1998," Energy Economics, Elsevier, vol. 26(1), pages 87-100, January.
    4. Al-Faris, Abdul Razak F., 2002. "The demand for electricity in the GCC countries," Energy Policy, Elsevier, vol. 30(2), pages 117-124, January.
    5. Keuzenkamp, Hugo A. & Barten, Anton P., 1995. "Rejection without falsification on the history of testing the homogeneity condition in the theory of consumer demand," Journal of Econometrics, Elsevier, vol. 67(1), pages 103-127, May.
    6. Dergiades, Theologos & Tsoulfidis, Lefteris, 2008. "Estimating residential demand for electricity in the United States, 1965-2006," Energy Economics, Elsevier, vol. 30(5), pages 2722-2730, September.
    7. A. De Janvry & J. Bieri & A. Nuñez, 1972. "Estimation of Demand Parameters under Consumer Budgeting: An Application to Argentina," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 54(3), pages 422-430.
    8. Halvorsen, Bente & Larsen, Bodil M., 2001. "The flexibility of household electricity demand over time," Resource and Energy Economics, Elsevier, vol. 23(1), pages 1-18, January.
    9. Deaton, Angus, 1988. "Quality, Quantity, and Spatial Variation of Price," American Economic Review, American Economic Association, vol. 78(3), pages 418-430, June.
    10. David E. A. Giles & Peter Hampton, 1985. "An Engel Curve Analysis of Household Expenditure in New Zealand," The Economic Record, The Economic Society of Australia, vol. 61(1), pages 450-462, March.
    11. Filippini, Massimo & Pachauri, Shonali, 2004. "Elasticities of electricity demand in urban Indian households," Energy Policy, Elsevier, vol. 32(3), pages 429-436, February.
    12. repec:bla:ecorec:v:61:y:1985:i:172:p:450-62 is not listed on IDEAS
    13. Thomas L. Cox & Michael K. Wohlgenant, 1986. "Prices and Quality Effects in Cross-Sectional Demand Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 68(4), pages 908-919.
    14. Narayan, Paresh Kumar & Smyth, Russell, 2005. "The residential demand for electricity in Australia: an application of the bounds testing approach to cointegration," Energy Policy, Elsevier, vol. 33(4), pages 467-474, March.
    15. Massimo Filippini, 1999. "Swiss residential demand for electricity," Applied Economics Letters, Taylor & Francis Journals, vol. 6(8), pages 533-538.
    16. Robert A. Pollak, 1971. "Additive Utility Functions and Linear Engel Curves," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(4), pages 401-414.
    17. Gundimeda, Haripriya & Kohlin, Gunnar, 2008. "Fuel demand elasticities for energy and environmental policies: Indian sample survey evidence," Energy Economics, Elsevier, vol. 30(2), pages 517-546, March.
    18. repec:bla:ecorec:v:58:y:1982:i:160:p:82-91 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shehabi, Manal, 2020. "Diversification effects of energy subsidy reform in oil exporters: Illustrations from Kuwait," Energy Policy, Elsevier, vol. 138(C).
    2. Edalati, Saeed & Ameri, Mehran & Iranmanesh, Masoud & Sadeghi, Zeinolabedin, 2017. "Solar photovoltaic power plants in five top oil-producing countries in Middle East: A case study in Iran," Renewable and Sustainable Energy Reviews, Elsevier, vol. 69(C), pages 1271-1280.
    3. Hosan, Shahadat & Rahman, Md Matiar & Karmaker, Shamal Chandra & Saha, Bidyut Baran, 2023. "Energy subsidies and energy technology innovation: Policies for polygeneration systems diffusion," Energy, Elsevier, vol. 267(C).
    4. Salehi, Hossain & Ziari, Esfandiar Doshman & Ziaei, Mohammad Sadegh, 2017. "The Effect of Raising Electricity Price on Welfare of the Household Sector in Rural Areas of Guilan Province, Iran," International Journal of Agricultural Management and Development (IJAMAD), Iranian Association of Agricultural Economics, vol. 7(2), June.
    5. Manal R. SHEHABI, 2017. "Assessing Kuwaiti Energy Pricing Reforms," Economics Discussion / Working Papers 17-08, The University of Western Australia, Department of Economics.
    6. Saeed Solaymani, 2016. "Impacts of energy subsidy reform on poverty and income inequality in Malaysia," Quality & Quantity: International Journal of Methodology, Springer, vol. 50(6), pages 2707-2723, November.
    7. Chatri, Fatemeh & Yahoo, Masoud & Othman, Jamal, 2018. "The economic effects of renewable energy expansion in the electricity sector: A CGE analysis for Malaysia," Renewable and Sustainable Energy Reviews, Elsevier, vol. 95(C), pages 203-216.
    8. Michael P. Vale, 2022. "Contextualizing Poverty along with the Sustainable Development Goals (SDG’s) 3, 6 and 9 as non-income indicators in Ocampo, Camarines Sur Philippines: Evidences from CBMS 2019," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(8), pages 249-259, August.
    9. Gelan, Ayele U., 2018. "Kuwait's energy subsidy reduction: Examining economic and CO2 emission effects with or without compensation," Energy Economics, Elsevier, vol. 71(C), pages 186-200.
    10. Lin, Boqiang & Wang, Yao, 2020. "Does energy poverty really exist in China? From the perspective of residential electricity consumption," Energy Policy, Elsevier, vol. 143(C).
    11. Wang, Yao & Lin, Boqiang, 2021. "Performance of alternative electricity prices on residential welfare in China," Energy Policy, Elsevier, vol. 153(C).
    12. Perera, Pradeep & Sarker, Tapan & Islam, K. M. Nazmul & Belaïd, Fateh & Taghizadeh-Hesary, Farhad, 2021. "How Precious Is the Reliability of the Residential Electricity Service in Developing Economies? Evidence from India," ADBI Working Papers 1211, Asian Development Bank Institute.
    13. Lam Do & Thai-Ha Le, 2023. "On the welfare effect of retail electricity subsidy in Vietnam," Journal of Economics and Development, Emerald Group Publishing Limited, vol. 25(4), pages 286-301, August.
    14. Osama Alfalah & Lama Alhumaidan & Deniz Baglan, 2020. "The Demand for Electricity in Kuwait: A Cointegration Analysis," International Journal of Energy Economics and Policy, Econjournals, vol. 10(6), pages 9-13.
    15. Al Iriani, Mahmoud A. & Trabelsi, Mohamed, 2016. "The economic impact of phasing out energy consumption subsidies in GCC countries," Journal of Economics and Business, Elsevier, vol. 87(C), pages 35-49.
    16. Lam Do, Truong Phuong, 2021. "Retail Electricity Subsidy in Vietnam : Review and Welfare Effect Under Reform," Warwick-Monash Economics Student Papers 31, Warwick Monash Economics Student Papers.
    17. Alshawaf, Mohammad & Poudineh, Rahmatallah & Alhajeri, Nawaf S., 2020. "Solar PV in Kuwait: The effect of ambient temperature and sandstorms on output variability and uncertainty," Renewable and Sustainable Energy Reviews, Elsevier, vol. 134(C).
    18. Hua Liao & Zhi-Shuang Zhu & Lu Wang, 2011. "Impact of removal of city gas subsidies on Chinese urban residents," CEEP-BIT Working Papers 23, Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology.
    19. Ghoddusi, Hamed & Morovati, Mohammad & Rafizadeh, Nima, 2022. "Dynamics of fuel demand elasticity: Evidence from Iranian subsidy reforms," Energy Economics, Elsevier, vol. 110(C).
    20. Solaymani, Saeed & Kari, Fatimah, 2014. "Impacts of energy subsidy reform on the Malaysian economy and transportation sector," Energy Policy, Elsevier, vol. 70(C), pages 115-125.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cialani, Catia & Mortazavi, Reza, 2018. "Household and industrial electricity demand in Europe," Energy Policy, Elsevier, vol. 122(C), pages 592-600.
    2. Amusa, Hammed & Amusa, Kafayat & Mabugu, Ramos, 2009. "Aggregate demand for electricity in South Africa: An analysis using the bounds testing approach to cointegration," Energy Policy, Elsevier, vol. 37(10), pages 4167-4175, October.
    3. Ziramba, Emmanuel, 2008. "The demand for residential electricity in South Africa," Energy Policy, Elsevier, vol. 36(9), pages 3460-3466, September.
    4. Pellini, Elisabetta, 2021. "Estimating income and price elasticities of residential electricity demand with Autometrics," Energy Economics, Elsevier, vol. 101(C).
    5. Gaivoronskaia, Elizaveta, 2020. "Electricity demand elasticity and regional effects: Spatial econometric approach," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 58, pages 76-95.
    6. Labandeira, Xavier & Labeaga, José M. & López-Otero, Xiral, 2012. "Estimation of elasticity price of electricity with incomplete information," Energy Economics, Elsevier, vol. 34(3), pages 627-633.
    7. Pourazarm, Elham & Cooray, Arusha, 2013. "Estimating and forecasting residential electricity demand in Iran," Economic Modelling, Elsevier, vol. 35(C), pages 546-558.
    8. M.Adetunji BABATUNDE & M.Isa SHAUIBU, 2011. "The Demand for Residential Electricity in Nigeria," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 21, pages 1-13.
    9. World Bank, 2011. "A New Slant on Slopes : Measuring the Benefits of Increased Electricity Access in Developing Countries," World Bank Publications - Reports 2742, The World Bank Group.
    10. repec:bla:opecrv:v:33:y:2009:i:1:p:70-96 is not listed on IDEAS
    11. Daniel Morais de Souza & Rogerio Silva de Mattos & Alexandre Zanini, 2022. "Estimating Elasticities for the Residential Demand of Electricity in Brazil Using Cointegration Models," International Journal of Energy Economics and Policy, Econjournals, vol. 12(2), pages 315-324, March.
    12. Tiwari, Aviral Kumar & Menegaki, Angeliki N., 2019. "A time varying approach on the price elasticity of electricity in India during 1975–2013," Energy, Elsevier, vol. 183(C), pages 385-397.
    13. Narayan, Paresh Kumar & Smyth, Russell & Prasad, Arti, 2007. "Electricity consumption in G7 countries: A panel cointegration analysis of residential demand elasticities," Energy Policy, Elsevier, vol. 35(9), pages 4485-4494, September.
    14. Adewuyi, Adeolu O., 2016. "Determinants of import demand for non-renewable energy (petroleum) products: Empirical evidence from Nigeria," Energy Policy, Elsevier, vol. 95(C), pages 73-93.
    15. Inglesi, Roula, 2010. "Aggregate electricity demand in South Africa: Conditional forecasts to 2030," Applied Energy, Elsevier, vol. 87(1), pages 197-204, January.
    16. Halicioglu, Ferda, 2007. "Residential electricity demand dynamics in Turkey," Energy Economics, Elsevier, vol. 29(2), pages 199-210, March.
    17. Lee Lian Ivy-Yap & Hussain Ali Bekhet, 2015. "Examining the Feedback Response of Residential Electricity Consumption towards Changes in its Determinants: Evidence from Malaysia," International Journal of Energy Economics and Policy, Econjournals, vol. 5(3), pages 772-781.
    18. Fedoseeva, Svetlana & Zeidan, Rodrigo, 2018. "How (a)symmetric is the response of import demand to changes in its determinants? Evidence from European energy imports," Energy Economics, Elsevier, vol. 69(C), pages 379-394.
    19. Koch, Steven F. & Nkuna, Blessings & Ye, Yuxiang, 2024. "Income elasticity of residential electricity consumption in rural South Africa," Energy Economics, Elsevier, vol. 131(C).
    20. Salari, Mahmoud & Javid, Roxana J., 2016. "Residential energy demand in the United States: Analysis using static and dynamic approaches," Energy Policy, Elsevier, vol. 98(C), pages 637-649.
    21. Boogen, Nina & Datta, Souvik & Filippini, Massimo, 2021. "Estimating residential electricity demand: New empirical evidence," Energy Policy, Elsevier, vol. 158(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:34:y:2012:i:2:p:419-425. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.