Beyond the bill: the hidden welfare costs of rising residential energy prices in South Korea

This study examines how household adjustments to rising residential energy prices amplify welfare losses. Using household-level expenditure data from the Korean Household Income and Expenditure Survey from 2019 to 2022, we construct a pseudo-panel and estimate the Exact Affine Stone Index (EASI) model. Our analyses identify several key findings. First, the results represent that household energy demand is complementary with food and health expenditures but substitutable with transport and other goods. This implies that households tend to adjust their spending patterns in response to energy price fluctuations. Second, the results reveal that the Engel curve for energy exhibits a declining trend across expenditure percentiles. This indicates that lower-expenditure households allocate a larger share of their budget to energy, suggesting greater vulnerability to rising energy prices. Third, welfare simulations reveal that allowing for households’ budget adjustments yields compensating variation estimates that are approximately 1.3 times larger than those obtained under a no-adjustment scenario when energy prices double. These findings highlight that ignoring behavioural adjustments may lead to an underestimation of the welfare impacts of rising residential energy prices, particularly for low‑income households.