Energy populism and household welfare

- Energy populism is a class of unsustainable pricing policies observed in some developing economies.
- The cycle starts with energy prices set below opportunity costs followed by a reversion process.
- Due to the inefficiencies generated, returning to opportunity cost pricing implies a new higher opportunity cost.
- The empirical application is for Buenos Aires MA during the 2003-2014 period.
- We estimate the actual transfers, the non-poor bias, and the effects on the level and stability of household welfare.

Inspired on experiences observed in certain developing countries, we propose a simple model to explain the emergence of a class of subsidized energy price cycles. It exploits the use of median household's preferences for receiving transfer gains followed by future transfer losses. In our empirical application, we use data on natural gas and electricity prices, taxes, energy consumption, and household characteristics for the Buenos Aires Metropolitan Region during the 2003-2014 period. We provide detailed estimates of the actual transfers, their middle- to high-income bias and the corresponding effects on the level and stability of household welfare of a departure of energy prices from opportunity costs.