Estimating the distributional impact of time-of-day pricing of electricity

Abstract

We consider the general problem of recovering estimates of welfare measures such as willingness to pay, price indices, etc. from demand data with particular emphasis on the problem of unobserved taste variation across households. We model taste differences across households in a variance components framework and derive an iterative estimator for systems of demand equations with variance components which is relatively easy to compute. Finally we present an example of the methods we propose which involves time of day pricing of electricity. We are able to calculate the fraction of the population which would prefer such pricing policies to flat rate pricing.