Price Sensitive Consumer Demands in Energy Modeling--A Quadratic Programming Approach to the Analysis of Some Federal Energy Agency Policies

A 21 sector input-output model of the 1972 U.S. economy is extended to include consumer demands, imports, and exports as endogenous variables, and used to analyze some consequences of the price control policy adopted to mitigate the impact of the quadrupling of world crude oil prices in 1973-1974. It is assumed that household consumption of goods is linearly related to prices. An equilibrium of the model economy is then computed by solving a quadratic program. It is shown that the price control policy is equivalent to subsidizing imported oil with revenues from a tax on domestic crude production. Equilibria are computed under this policy and in its absence. The comparison indicates the policy was effective in reducing the price index increase and GNP reduction that would otherwise have occurred, but at the cost of adversely affecting the balance of payments.