Specification and estimation of demand functions : the residential demand for natural gas

Date Issued
June 1, 1981
Author(s)
Grady, Stephen Thomas
Advisor(s)
Hui-shyong Chang
Additional Advisor(s)
Robert Bohm
Henry W. Herzog
Hans B. Jensen
Gary Westley
Permanent URI
Abstract
Demand functions for the residential use of natural gas were estimated and used to evaluate certain aspects of the Natural Gas Policy Act of 1978. The data set used for analysis was pooled cross section, time series data by state for the years 1968-1978. Specific issues that were considered included the empirical examination of the potential of bias arising from functional form mis-specification and the mis-specificaion of relative own-price and real income in the demand functions. The approach of this research was to utilize a generalized functional form for the natural gas demand equation within the context of an error components model with a heteroscedastic error structure. The parameter estimates were determined by maximizing a likelihood function developed as part of the research. Separate equations were estimated for categories of states, where each category accounted for different availability conditions; states within the same category had essentially equivalent availability of natural gas, but the availability characteristics between two states in different categories were not equivalent. Availability was defined in terms of several factors related to marketed production and the quantity of natural gas pipelines.

The demand functions were specified with the average consumption per natural gas household as the dependent variable. The results indicated that natural gas demand is inelastic in both the short- and long-run. The average own-price long-run elasticity was estimated to be -0.40. The Engel curves were estimated as horizontal over the sample values for income and natural gas consumption. The substitution possibilities among alternative energy sources within a typical gas household were estimated to be negligible. The effects of higher residential natural gas prices that will most likely follow the partial, phased deregulation of natural gas wellhead prices allowed under the Natural Gas Policy Act of 1978 on a typical household budget were found to be relatively insignificant.

Degree
Doctor of Philosophy
Major
Economics
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