An application of Ramsey pricing in solving the cross-subsidies in Chinese electricity tariffs

Abstract

Chinese electricity tariffs are characterized by the high rates for industrial and commercial customers to allow subsidized consumption in residential sectors. Some econometric methodologies are applied in this paper to estimating the price elasticities of demand for residential and industrial consumers based on the data of 22 provinces in China during 2003-2005. The marginal-cost and the Ramsey number are calculated respectively. Then the Ramsey electricity tariffs in China are derived. The comparison between the current electricity tariffs and the Ramsey tariffs shows that the existing tariffs do not satisfy the Ramsey quasi-optimal criteria and the empirical results indicate that the cross-subsidies in electricity tariffs induce efficiency losses. We also point out that the reduction or elimination of cross-subsidies through an increase of the residential electricity tariff as well as a slight decrease of the industrial tariff under the Ramsey pricing scheme could improve the economic efficiencies and the social welfare.