LAUSR

Our purpose is to empirically investigate necessary and extra demand of a consumer for public utility product. Our paper makes three contributions. First, using the stochastic frontier model, we identify necessary and extra demand in a consumer’s consumption. Second, we calculate the rates of necessary and extra demand in a consumer’s consumption and compare the relative importance of the two. Third, we examine the effects of internal and external incentives for extra demand. By empirical investigation using electricity consumption data on 557 Japanese households in 2012, we obtain the following results. First, physical conditions such as house size, the number of electric appliances, and family size surely determine necessary demand. Second, the demand response mechanism alone does not reduce extra demand, while it can reduce extra demand when combined with the consciousness of saving energy. Third, since necessary demand comprises the preponderance of total consumption, investigations into optimizing the physical conditions of consumers are important.