Efficiency and equity of electricity pricing: Evidence from family-size-based IBP in Shanghai, China

Abstract

This paper investigates the impact of incorporating family size into increasing block pricing (IBP) for residential electricity on social equity and efficiency in Shanghai, China. Using an instrumental variable approach, we first identify the heterogeneous elasticity of electricity demand between small and large families. We then conduct a comparative analysis of IBP with and without family-size adjustments, assessing their redistributional outcomes and transfer-related costs relative to a break-even flat rate. Our findings show that family-size-based IBP achieves the intended redistributional outcomes with minimal efficiency costs, regardless of whether per capita or total income is prioritized when evaluating social equity. These results suggest that incorporating family-size-based criteria into electricity pricing could be an effective and efficient strategy to enhance social equity.