The Intended and Unintended Consequences of Large Electricity Subsidies: Evidence from Mongolia

Abstract

We investigate the effectiveness of large electricity subsidies aimed at reducing the consumption of coal for heating and improving the ambient air quality. We exploit a policy change in Mongolia that provides 50--100 percent tariff subsidy on the off-peak hour electricity consumption to households in specific zones of its capital city, Ulaanbaatar. Using six rounds of the Mongolia Household Socio-Economic Survey data, we find that households receiving the electricity subsidy increase their overall (subsidized and unsubsidized) electricity expenditure by at least 20 percent more than those who did not receive the subsidy. The expenditure pattern indicates that households changed their behavior of peak hour and non-winter season electricity consumption, which remained unsubsidised. We show the subsidies reduced air pollution, and the likelihood of reporting respiratory illness.

Keywords: Electricity demand, Inequality of electricity access, health, Development, Mongolia