Price Perception and Electricity Demand with Nonlinear Tariffs

Abstract

Increasing block tariffs for electricity and water provide a subsidy for low users and a conservation incentive for high users. However, their effectiveness may depend on both how well consumers understand the nonlinear structure and how attentive they are to consumption. We develop a novel price elicitation instrument to recover these components of price perceptions and apply the instrument to an electricity tariff introduced in Kyrgyzstan in late 2014. We document considerable heterogeneity in understanding of the new price structure. The households with the best understanding of the tariff had the largest reduction in their electricity consumption. However, this effect was driven by those households who were inattentive to their own position on the price schedule. The results suggest that providing consumer-specific information about the effect of new nonlinear tariffs might enhance their political acceptability.

Publication
Working Paper