Price Elasticity of Heat Demand in South Korean Manufacturing Sector: An Empirical Investigation

Abstract

Heat is a crucial input supplied in the form of steam or hot water to industrial production of South Korea. Estimating the demand function for heat in the manufacturing sector is all the more important a task in terms of policy because heat consumption in the manufacturing sector is increasing because using heat directly as a fuel can reduce the air pollutants emissions and save energy when compared with using electricity, which is secondary energy. Thus, this article tries to estimate the demand function for industrial heat in the manufacturing sector of South Korea using cross-sectional data for analyzing the influence of manufacturing firms’ characteristics. To this end, 257 observations collected from a nationwide survey of manufacturing firms in 2017 are used and analyzed. As a robust approach, the least absolute deviations estimation method is applied to obtain the demand function. The results show that the price elasticity and sales amount elasticity of the industrial heat demand are estimated to be −0.8476 and 1.0144, respectively, which are statistically significant at the 1% level. Furthermore, the economic benefits of industrial heat consumption are computed to be 1.59 times as great as the price of heat. The results of this study can be utilized in policy planning, making, and evaluation.