A Dynamic Model of Demand for Durable Goods that Consume Energy

This paper uses a model of durable good purchase and usage to estimate the longrun effect of energy rates on residential energy demand. Whereas previous attempts to estimate energy demand have predominantly taken durable good portfolios as given, this model endogenizes durable good holdings with a model in which households consider the tradeoff between purchase cost and operating cost in deciding whether or not to replace old durable goods. Simulation results from a restricted version of the model are compared to observed replacement behavior in the Residential Energy Consumption Survey. The results from the simulation suggest that for the period 1975-2000 a 50% increase in energy rates would have caused energy demand derived from the usage of central air conditioners, gas water heaters and refrigerators to decrease 8%, 0% and 13%, respectively. 1 Household Durables and Energy Consumption Early studies recognized that residential energy demand depends to a large degree on the characteristics of the energy-consuming durable goods owned by households. This observation led to a distinction between short-run and long-run demand elasticities. In the short-run, households respond to increases 1Department of Economics, University of Wisconsin, Madison, 53706; email: [email protected]