An exploration of own and cross-price elasticity of demand for residential heating in the Fairbanks North Star Borough

Abstract

The purpose of this study is to utilize community level household energy consumption data to determine the short-run own- and cross-price elasticity of heating oil and wood using the proportionally calibrated almost idea demand system model. Elasticity values can identify how residents of the Fairbanks North Star Borough will potentially alter home heating practices in response to a change in home heating oil price. Results indicate that values for own-price elasticity for oil is -0.259, with a 95% confidence interval of [-0.272, -0.246]. Based on predicted values a 1% increase in the price of heating oil is estimated to result in a reduction of 0.259% in the quantity of residential heating oil consumed by the average household. Cross-price elasticity estimates of wood with respect to a change in the price of oil is 0.198 with a 95% confidence interval of [0.171, 0.234]. Based on predicted values, a 1% increase in the price of oil is predicted to increase wood consumption by 0.198%. In addition, this study utilized a Monte Carlo Simulation with estimated elasticity parameters to predict the change in household level energy consumption of wood and heating oil given an increase in heating oil prices. Approximately 71% of households are predicted to decrease overall energy consumption. 83.5% of households are predicted to decrease oil consumption, and 57.3% of houses are predicted to increase wood consumption. Through evaluating household's energy consumption decisions in the face of changing prices, these results can inform effective air quality policies.