Misunderstanding Nonlinear Prices: Evidence from a Natural Experiment on Residential Electricity Demand
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Blake Shaffer
- American Economic Journal: Economic Policy (Forthcoming)
Abstract
This paper examines how consumers respond to nonlinear prices. Exploiting
a natural experiment with electricity consumers in British Columbia, I find
evidence that some households severely misunderstand nonlinear prices|
incorrectly perceiving that the marginal price applies to all consumption,
not simply the last unit. While small in number, the exaggerated responses
by these households have a large effect in aggregate, masking an otherwise
predominant response to average price. Previously largely unexplored in the
literature, this type of misunderstanding has important economic, policy
and methodological implications beyond electricity markets. I estimate the
welfare loss for these households to be the equivalent of 10% of annual
electricity expenditure.
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