Energy Policy and Energy Price Dispersion: Methods and Application to U.S. Data *

Abstract

Energy policy is increasingly aimed at achieving an efficient allocation of energy resources across alternative uses through the design and implementation of market-based incentives. According to the economists’ ‘law of one price,’ an efficient allocation is one that reduces spatial price dispersion to that which is consistent with transportation and transaction costs. Using data from the U.S. Energy Information Administration's State Energy Price and Expenditure Report, this paper examines the dispersion of U.S. energy prices for the period 1970–1993 using a variety of metrics. It is found that prices for electric utility inputs have converged. Dispersion for other energy products has increased, not due to rising energy prices, but primarily because energy prices are falling faster in regions with below-average pries than in regions with above-average prices. The current increased level of price dispersion appears to be a transient effect in the transition from a regulated sector to one based on free market principles.