Welfare Effects of Food Desubsidization for Iranian Urban Households

Abstract

Designing a system of policies for basic goods subsidy adjustments and welfare effects of subsidy reduction widely accentuate by Iranian policy makers and economists. This article tries to answer to the one of the main questions of this matter such as, "What the equivalent amount of money for compensative welfare loss of household is through eliminating bread, sugar and oil subsidies?" By using microeconomic methodology and with regards to the theoretical literature of welfare indices, demand systems and household clustering, we cluster household base on homogeneity of consumption behaviors and estimate linear approximate almost ideal demand systems (LA\AIDS) for different clusters in five independent groups and also compute welfare indices (equivalent income, compensated variation and the cost of living index). After that, we analyze results of bread, sugar and edible oils price adjustment in five groups of households. For cluster one to three, relative effects of bread price is greater than sugar and edible oils and for clusters four and five, relative effect for edible oils is greater than bread and sugar. Finally, we introduce "Policy Effects Matrix" for bread and conclude that its price adjustment policy is decreasing from cluster one to five.

Keywords: Welfare Indices, Compensated Variation, Cost of Living Index, Demand System, Subsidy

JEL Classification: D12, C43, H22, H24