Irreversible Price-Induced Efficiency Improvements: Theory and Empirical Application to Road Transportation

Energy demand since 1986 seems inconsistent with the notion of constant income and price elasticities reported in the literature. Energy demand growth remained sluggish despite the simultaneous substantial reduction in real fuel costs and increases in real income. This investigation differentiates, as it were, two different price effects that should explain this apparent asymmetry in energy demand. The first effect is embedded in the technical efficiency and therefore largely irreversible. The second effect revolves around consumers' decisions and hence is reversible. This dichotomy of the price effect provides a suitable framework to study energy demand (in this instance, road transport). Moreover, the projections and policy recommendations following from this framework differ from the standard symmetric specification. Moderate price increases will affect consumers' behaviour, while only sufficiently high gasoline prices will trigger further efficiency improvements. The present low growth rates of energy demand mask a much higher growth at the service level, therefore energy demand growth may accelerate as these efficiency gains die out (if price levels or price expectations remain low).