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Energy-Capital Substitution: A General Equilibrium Analysis

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  • Chichilnisky, Graciela
  • Heal, Geoffrey

Abstract

We consider an economy which imports energy from a monopolistic price-setter. The domestic general equilibrium of this economy adjusts in response to the price of energy. We define the total cross price elasticity of demand between energy and capital as the cross price elasticity across general equilibria of the economy, as the equilibrium changes in response to energy price changes. This corresponds to the price elasticity given by a total demand curve, and incorporates adjustments on both supply and demand sides. It is shown that whether this total elasticity implies energy-capital complementarity or substitutability depends upon the parameters of the model and the price of energy: for a given model, there may be a change from substitutability to complementarity as the price of energy rises. This framework offers an additional way of reconciling apparently conflicting findings on energy-capital complementarity and substitutability: an earlier suggestion was made by Berndt and Wood (1979). It is a natural extension of the general equilibrium approach initiated by Hogan (1977).

Suggested Citation

  • Chichilnisky, Graciela & Heal, Geoffrey, 1993. "Energy-Capital Substitution: A General Equilibrium Analysis," MPRA Paper 8329, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:8329
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    File URL: https://mpra.ub.uni-muenchen.de/8329/1/MPRA_paper_8329.pdf
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    References listed on IDEAS

    as
    1. Akerlof, George A. & Burmeister, Edwin, 1970. "Substitution in a general equilibrium framework," Journal of Economic Theory, Elsevier, vol. 2(4), pages 411-422, December.
    2. Berndt, Ernst R & Wood, David O, 1979. "Engineering and Econometric Interpretations of Energy-Capital Complementarity," American Economic Review, American Economic Association, vol. 69(3), pages 342-354, June.
    3. repec:bla:scandj:v:79:y:1977:i:2:p:210-26 is not listed on IDEAS
    4. Solow, John, 1979. "A general equilibrium approach to aggregate capital-energy complementarity," Economics Letters, Elsevier, vol. 2(1), pages 91-94.
    5. Berry, R. Stephen & Salamon, Peter & Heal, Geoffrey, 1978. "On a relation between economic and thermodynamic optima," Resources and Energy, Elsevier, vol. 1(2), pages 125-137, October.
    6. Griffin, James M & Gregory, Paul R, 1976. "An Intercountry Translog Model of Energy Substitution Responses," American Economic Review, American Economic Association, vol. 66(5), pages 845-857, December.
    7. H. S. Houthakker, 1955. "The Pareto Distribution and the Cobb-Douglas Production Function in Activity Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 23(1), pages 27-31.
    8. Berndt, Ernst R & Wood, David O, 1975. "Technology, Prices, and the Derived Demand for Energy," The Review of Economics and Statistics, MIT Press, vol. 57(3), pages 259-268, August.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Chichilnisky, Graciela, 1986. "Trade and development in the 1980s," MPRA Paper 8035, University Library of Munich, Germany.
    2. Shaik, Saleem & Yeboah, Osei-Agyeman, 2018. "Does climate influence energy demand? A regional analysis," Applied Energy, Elsevier, vol. 212(C), pages 691-703.
    3. Koetse, Mark J. & de Groot, Henri L.F. & Florax, Raymond J.G.M., 2008. "Capital-energy substitution and shifts in factor demand: A meta-analysis," Energy Economics, Elsevier, vol. 30(5), pages 2236-2251, September.
    4. Thompson, Henry, 2006. "The applied theory of energy substitution in production," Energy Economics, Elsevier, vol. 28(4), pages 410-425, July.
    5. Hokky Situngkir, 2004. "Inequality And Oil Subsidy In Indonesia," Macroeconomics 0405004, University Library of Munich, Germany.

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    More about this item

    Keywords

    price elasticity; substitutability; complementarity; energy; energy prices; general equilibrium; monopoly;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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