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

Abstract

Energy demand since 1986 seems inconsistent with the notion of constant income andprice elasticities reported in the literature. Energy demand growth remained sluggish despite the simultaneous substantial reduction in real fuel costs and increases in real income. lhis investigation dtflerentiates, as it were, two dtrerent price effects that should explain this apparent asymmetry in energy demand. lhe first e#ect is embedded in the technical eficiency and therefore largely irreversible. lhe 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 dtrer ffom the standard symmetric spect@ation. Moderate price increases will affect consumers’ behaviour, while only suflciently high gasoline prices will triggerfurther eflciency 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 eficiency gains die out @price levels or price expectations remain low).