Price Elasticity of Gasoline Smuggling: A Semi-Structural Estimation Approach
37 Pages Posted: 19 Apr 2017
Date Written: April 17, 2017
We estimate the price elasticity of demand for gasoline smuggling in Iran. For this purpose, a detailed panel of monthly gasoline consumption data for 160 distribution hubs from 2005-2014 is used. We apply two different approaches, namely diff-in-diff and panel data estimations. The results suggest that foreign to home gasoline price ratios have a significant impact on the time-varying elasticity of demand. It supports the hypothesis that an increase in the domestic gasoline prices will significantly reduce the demand for smuggling. In addition, as the Iranian currency depreciates, the price elasticity of demand for gasoline smuggling increases. Finally, we find that the gasoline demand sensitivity to price in neighboring countries goes up when the ratio of foreign to domestic prices is higher. Our work offers new insights regarding the welfare impact of removing fuel subsidies and modifying fuel pricing policies.
Keywords: Gasoline Smuggling , Fuel Subsidy Removal, Price Elasticity, Gasoline Price Differential, Panel Data Estimation
JEL Classification: C23, F15, H77, Q41
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