This study analyzes the welfare impact of the residential electricity tariff escalation initiated in July 2008 on households in Turkey. Empirical analysis consists of estimation of household electricity demand using TurkStat 2007, 2008 and 2009 budget survey" data and Hicksian compensating variation of welfare. The estimated income elasticities by income strata were found to be close to each other, confirming that electricity is a necessity good and the magnitude of the elasticities decreases as income goes up (ranging from 0.74 to 0.91 for income strata). The magnitude of the income elasticities by income strata was found to be very low compared to the long-run income elasticities in previous time series studies. The estimated income elasticity by income strata and the mean value of the Marshallian long-run own-price elasticity for residential electricity obtained from previous time series models were used to obtain Hicksian own-price elasticities using Slutsky decomposition for each income strata. The welfare measure which relied on Hicksian compensating variation indicated that welfare loss of households from 2007 to 2009 was around 9-10 percent by income strata as compared to the situation before tariff adjustment. It is expected that welfare losses would be greater if the analysis period were extended to 2012.
Residential electricity demand, income elasticity of electricity demand, welfare impact of electricity price escalation, Slutsky decomposition. JEL Classification: D12, D13, D60.