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Estimating Price Elasticity of Natural Gas Demand in Iran's Residential Sector: A Regression Discontinuity Approach

Makhsousi, Mohammad Hossein | 2023

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 57039 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Rahmati, Mohammad Hossein; Vesal, Mohammad
  7. Abstract:
  8. Estimating the price elasticity of gas demand involves complexities depending on the gas market structure and pricing mechanisms in different countries. Distinguishing between supply and demand shocks and block pricing are among the main challenges that can cause endogeneity in elasticity estimates. Iran's domestic gas network, one of the largest and most extensive household gas markets, is divided into five climatic zones based on weather conditions. The pricing steps for these five climates during the five cold months are such that a customer in a warmer climate pays higher prices. Conversely, the pricing steps for the seven warm months are the same for all climates. This policy creates a price difference in two ways: first, between two adjacent climates in the cold season, and second, between the cold and warm seasons within each climate. This research utilizes household consumption data from Fars province, which encompasses all five climates and five climate change boundaries. To address the endogeneity challenge arising from block pricing, it employs the price gap between two climates and between two seasons from "being in a warmer climate" * "being in the cold season" as an instrumental variable. Furthermore, by measuring the distances of consumers to the climate change boundary, similar to the geographical regression discontinuity approach, it controls for the distance from the boundary. Combining these two methods offers a novel solution to the challenges of estimating the price elasticity of gas demand. The results indicate an elasticity ranging from -0.50 to -0.84
  9. Keywords:
  10. Energy Economy Model ; Regression Discontinuity Design ; Difference-in-Difference Method ; Price Elasticity ; Natural Gas Demand ; Gas Price ; Estimating Demand Elasticity

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