Estimating residential and industrial city gas demand function in the Republic of Korea-A kalman filter application

Abstract

This paper analyzes the city gas demand function in Korea from 1998 to 2018. The demand function of city gas is derived by a Kalman filter method, and price and income elasticities varying with time are estimated. In the case of residential city gas, the price elasticity gradually decreased to a value of approximately 0.57, while income elasticity increased to approximately 1.48 from 1998 to 2018. Alternatively, industrial city gas demand's price and income elasticities have been estimated as inelastic, as their absolute values were less than unity over time. The absolute values of price and income elasticities are estimated to be larger for residential than industrial city gas, and thus, city gas consumers are more likely to respond to changes in price and income for residential than industrial city gas. There is a substantial income effect on demand for residential city gas in Korea, whereas industrial city gas is found to have relatively small income and price effects. The results of this study provide policy makers with a Kalman filter method to access more accurate information on the city gas demand function's elasticities, which change with time.