Dynamics of Fuel Demand Elasticity: Evidence from Iranian Subsidy Reforms

39 Pages Posted: 6 Jan 2019 Last revised: 29 Apr 2022

See all articles by Hamed Ghoddusi

Hamed Ghoddusi

California State Polytechnic University, San Luis Obispo; Economic Research Forum

Mohammad Morovati

Khatam University

Nima Rafizadeh

HEC Montreal

Date Written: January 6, 2019

Abstract

We exploit three major transport fuel (gasoline and diesel) subsidy reforms in Iran, as quasi-experiments, to investigate the impact of permanent upward price changes on the responsiveness of fuel consumption. We employ monthly regional-level data of fuel consumption in Iran and also explicitly account for outbound cross-border smuggling from Iran to estimate the short, intermediate, and long-term price elasticity of demand. We find that price elasticity and price levels are inversely related to each other. All of our estimations also suggest a substantial impact of subsidy reforms on consumers' behavior such that the magnitude of price elasticities consistently increases after each of the three major reforms. Finally, we find that fuel consumption is more responsive to a change in domestic price in the longer run. Our paper provides quantitative evidence of behavior change after a subsidy reform program, which can be used to better set fiscal and environmental targets.

Keywords: Subsidized Fuel, Subsidy Reform, Price Elasticity, Time-Varying Elasticity, Panel Data Estimation

JEL Classification: C23, H71, Q41, Q48

Suggested Citation

Ghoddusi, Hamed and Morovati, Mohammad and Rafizadeh, Nima, Dynamics of Fuel Demand Elasticity: Evidence from Iranian Subsidy Reforms (January 6, 2019). Energy Economics, Vol. 110, 2022, Available at SSRN: https://ssrn.com/abstract=3305126 or http://dx.doi.org/10.2139/ssrn.3305126

Hamed Ghoddusi

California State Polytechnic University, San Luis Obispo ( email )

San Luis Obispo, CA 93407
United States

Economic Research Forum ( email )

Cairo
Egypt

Mohammad Morovati

Khatam University ( email )

Tehran
Iran

Nima Rafizadeh (Contact Author)

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

HOME PAGE: http://www.nimarafizadeh.com/

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