Electricity Cross-Subsidies in the People’s Republic of China: Equity, Reverse Ramsey Pricing, and Welfare Analysis

We present one explanation of the phenomenon of reverse Ramsey pricing in the PRC's power market. Based on a modified Ramsey model, we assume the government has different weights on residential and industrial consumer surplus and derive a reverse Ramsey pricing rule. To numerically demonstrate that the reverse Ramsey pricing rule is reasonable under some circumstances, we calibrate the model and simulate social welfare under different scenarios. We find that the reverse Ramsey pricing rule is optimal if we introduce equity considerations, and the greater the weight of the residential sector, the lower the residential electricity prices. Our social welfare simulation results under different scenarios provide useful guidance for policy makers in future energy reform.