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Valuing electricity-dependent infrastructure: An essential-input approach

Jed Cohen, Klaus Moeltner (), Johannes Reichl and Michael Schmidthaler

Energy Economics, 2018, vol. 73, issue C, 258-273

Abstract: Electricity is an essential input to both the production of household commodities, and the provision of public infrastructure services. The latter, in turn, are essential to the generation of additional household goods. Thus, customers' willingness to pay to avoid power interruptions will reflect both aspects of foregone household production. We recognize this as an opportunity to value infrastructure services via stated preference methods based on power outage scenarios. We motivate our model using household production theory, and implement it empirically within a Random Utility framework to derive European households' willingness-to-pay to avoid disruption of electricity provision to the “front door,” as well as the loss of important public services. We find that a considerable portion of total willingness-to-pay, to the order of 20–80%, relates to the public service component. This stresses the importance of explicitly specifying the scale of outages and their effect on public services in stated preference elicitation. Failure to do so will produce welfare estimates that are unfit to inform policy, and normalized outage cost estimates that are biased - potentially by a very large margin.

Keywords: Power outages; Public infrastructure; Multivariate probit; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 C35 D13 H42 Q40 Q51 (search for similar items in EconPapers)
Date: 2018
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