Energy-Capital Substitution: A General Equilibrium Analysis

Chichilnisky, G. & Heal, G. (1983). Energy-Capital Substitution: A General Equilibrium Analysis. IIASA Collaborative Paper. IIASA, Laxenburg, Austria: CP-83-006

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We consider an economy which imports energy from a monopolistic price-setter. The domestic general equilibrium of this economy adjusts in response to the price of energy. We define the total cross price elasticity of demand between energy and capital as the cross price elasticity across general equilibria of the economy, as the equilibrium changes in response to energy price changes. This corresponds to the price elasticity given by a total demand curve, and incorporates adjustments on both supply and demand sides. It is shown that whether this total elasticity implies energy-capital complementarity or substitutability depends upon the parameters of the model and the price of energy: for a given model, there may be a change from substitutability to complementarity as the price of energy rises. This framework offers an additional way of reconciling apparently conflicting findings on energy-capital complementarity and substitutability: an earlier suggestion was made by Berndt and Wood (1979). It is a natural extension of the general equilibrium approach initiated by Hogan (1977).

Item Type: Monograph (IIASA Collaborative Paper)
Research Programs: System and Decision Sciences - Core (SDS)
Depositing User: IIASA Import
Date Deposited: 15 Jan 2016 01:54
Last Modified: 27 Aug 2021 17:11

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