Cost and demand functions of electricity in Gambia from 1982 to 2007

This paper argues that an electricity demand should be estimated simultaneously with the supply. It then estimates the demand for and the supply of the electricity in the Gambia using reduced form regressions and vector error correction methods. The paper finds that systems of simultaneous equations cannot be simplified to reduced form regressions to satisfy the statistical requirements, but rather the theoretical modeling requirements determine the choice of the statistical model. The vector error correction method incorporating the theoretical restrictions of the model is found to better fit the data than the reduced form regressions. From the estimation results of this method, the electricity demand is found to be price elastic and income elastic. The electricity demand is found to shrink if the company charges an average price higher than 1.3 times of the per capita GDP growth rate; and since the demand is price elastic, increasing the electricity price will result in falling revenues for the company. The electricity industry, which here refers to the national electricity company, exhibits diseconomies of scale. The industry is found inefficient, and failing to innovate and accumulate knowledge to enable it to expand output with falling average unit cost. With the current operation, the expansion of output could be undertaken only with increasing average unit cost and hence increasing electricity price.