Price and Income Elasticities of Residential Heat Demand from District Heating System: A Price Sensitivity Measurement Experiment in South Korea

Abstract

Since the price for residential heat (RH) from district heating system in South Korea is regulated by the government rather than being freely determined in the market, it is difficult to estimate the demand function for RH properly using the distorted market data. Thus, undistorted data on price and demand are required in obtaining the demand function. This article tries to estimate the demand function for RH by applying the price sensitivity measurement (PSM) technique, with some variation, and then use this to obtain information about the price and income elasticities. To this end, in the PSM survey 1000 households were first asked about their consumption of RH and their expenditure on that consumption and then asked about how much they would lower their demand for RH in response to four hypothetical increases in the price for RH (10%, 20%, 50%, and 100%). Thus, five sets of price and consumption of RH were available for each household. The demand function for RH was estimated using a total of 5000 observations. The price and income elasticities were estimated with statistical significance to be about −0.478 and 0.033, respectively. These values can be utilized in decision-making and/or policy-making related to RH management.