Buchsbaum, Jesse “Long-Run Price Elasticities and Mechanisms: Empirical Evidence from Residential Electricity Consumers” (October 2022) | WP-331 | Blog
Long-run elasticities, while difficult to empirically estimate, are critical inputs for welfare analysis, demand forecasting, and policy evaluation. In this paper, I leverage a novel source of exogenous and persistent price variation to estimate the long-run price elasticity of demand for residential electricity consumers. I find that consumers are much more responsive to prices in the long run than the short run, with a long-run elasticity estimate of -2.4, in contrast with a short-run elasticity estimate of -0.36. Low-income consumers are particularly responsive to prices in the long run, emphasizing the importance of bill salience to low-income households. I explore some of the mechanisms driving this price response, and find that households facing higher prices are less responsive to temperature than those facing low prices. My findings highlight the importance of getting electricity prices right, and suggest that retail electricity prices might play a more significant role than previously thought in determining the pace of energy transitions to cleaner technologies.