Welfare analysis of electricity distribution: The Dignity Tariff in Bolivia

We conduct an analysis of the demand functions associated with electricity distribution in Bolivia, focusing on the implications of price fluctuations on consumer welfare. This analysis requires the estimation of demand functions, which we achieve through the application of panel data with fixed effects and the use of instrumental variables. Additionally, we apply propensity score matching (PSM) to compare electricity expenditures between beneficiary and comparable non-beneficiary households, providing an independent welfare estimate grounded in observed household behaviour rather than structural demand parameters alone. In 2006, the Bolivian government introduced the Dignity Tariff, aimed at regulating electricity distribution costs for both urban and rural households. This tariff offers a 25% reduction in electricity prices for households that consume up to 70 kWh per month. Our key findings indicate that the Dignity Tariff effectively acts as a subsidy for electricity consumption. Estimates derived from demand functions suggest an average monthly welfare gain ranging from Bs 17.98 to Bs 21.12 (USD 2.58 to USD 3.03), while propensity score matching yields an average monthly saving of approximately Bs 47 (USD 6.75) for beneficiary households, providing significant financial relief to economically vulnerable populations. • Bolivia's Dignity Tariff raises welfare for households using under 70 kWh a month. • Four demand models give monthly welfare gains of 2.58 to 3.03 US dollars. • Propensity score matching gives a larger monthly gain of about 6.75 US dollars. • Electricity costs take 6.3% of income in the poorest decile before the subsidy. • The subsidy cuts that cost burden by 16 to 48% for the lowest income group.