Scandinavian Working Papers in Economics
Umeå Economic Studies,
Umeå University, Department of Economics
No 576: Evaluating market efficiency without price data. The Swedish market for wood fuel
Runar Brännlund (), Per-Olov Marklund () and Magnus Sjöström ()
Additional contact information
Runar Brännlund: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Per-Olov Marklund: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Magnus Sjöström: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Abstract: The objective of this paper is to shed some empirical light on the price development and price formation for wood fuel used by the Swedish district heating sector. According to Lönner et.al. (1998), there is a significant potential for increasing the use of wood fuel in Sweden, and that at a fairly moderate cost. The basic question raised in this paper is why this potential is not realized, in spite of the low cost. Here we identify three possible explanations; (1) the marginal cost for providing wood fuel is higher than expected, (2) the market for wood fuel is not functioning efficiently due to market imperfections, (3) investments in wood fuel burning technology do not take place due to risk and uncertainties concerning the future energy taxation system. In this paper we focus the second explanation, and propose a methodology for testing whether the market imperfections are present. The test we propose is a two-step procedure. In the first step the shape of the technology in the Swedish district heating sector is estimated. In the second we combine the estimated technology and the assumption of cost-minimizing firms to calculate shadow prices of wood-fuel, i.e., marginal valuation of wood fuel in this sector. If the average shadow price significantly deviates from the average observed price we may conclude that this market is inefficient. To construct confidence intervals for the shadow price we use bootstrap techniques. The resulting point estimates of the shadow price implies that this market is inefficient in the sense that the firms values additional quantities higher than the ruling price, implying that too small quantities of wood fuel is traded. However, according to the bootstrap confidence intervals this difference between the shadow price and the ruling price is not significant, implying that we cannot, on statistical grounds, reject the efficient market hypothesis.
Keywords: wood fuel; fuelwood; market efficiency; shadow price; bootstrap
23 pages, December 7, 2001
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