Measuring willingness to pay for electricity.

Includes bibliographical references

Introduction -- Derivation of the electricity demand function -- The household demand for electricity --The firms demand for electricity -- A functional form for the demand for electricity -- An illustrative example -- Conclusins -- Appendix -- References.

The measurement of willingness to pay for electricity relies critically on a reliable estimate of the demands for electricity function. However, standard microeconomic theory falls short in providing a plausible framework within which such estimation could be made, at least in the case of electricity. Empirical work to date generally tends to assume that the demand for electricity has no satiation point. Many electricity demand models assume a constant price elasticity, which implies infinite demand at low prices. Many demand models also do not allow for the possibility of goods at zero price because the price variable is in logarithmic form for which zero is undefined. The purpose of this technical note is to propose a plausible functional form for the demand for electricity. The proposed functional form is consistent with two properties of electricity demand functions for households and firms, namely, the negative relationship between price and quantity, and the finiteness of demand at zero price. The technical note also demonstrates that this functional form of the demand function leads to easily estimable economic benefits of electricity.