Impacts of eliminating the factor distortions on energy efficiency—A focus on China's secondary industry

Market-oriented reforms on production factors in China are far lagged behind that of the commodity market, remaining the problem of price distortion in production factor markets. In this paper, we measure the degree of relative price distortion among capital, labor and energy focusing on China's secondary industry. Then, we take the own-price and cross-price elasticities as the link to estimate the demand changes of the three production factors in three cases. At last, we estimate the influence of relative price distortion elimination on the total factor energy efficiency. The main findings are: relative price distortions among the three factors exist. No matter taking the prices of capital, energy or labor as the benchmark, the prices of the other two kinds of production factors should be changed. Second, the own-price elasticities of the factors are negative, while the cross-price elasticities between the factors are positive, indicating the substitutability among the factors. Finally, correcting the relative price distortion can serve for the improvement of total factor energy efficiency of China's secondary industry. Therefore, if taking improvement of total factor energy efficiency as the goal, eliminating the price distortion in the factor market is necessary.