Dynamics of Fuel Demand Elasticity: Evidence from Subsidy Reforms

41 Pages Posted: 6 Jan 2019 Last revised: 20 Apr 2020

See all articles by Hamed Ghoddusi

Hamed Ghoddusi

Stevens Institute of Technology - School of Business; Economic Research Forum

Mohammad Morovati

Khatam University

Nima Rafizadeh

affiliation not provided to SSRN

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 and also explicitly take into account outbound cross-border smuggling to estimate the short, intermediate and long-term price elasticity of demand. We find that price elasticities and the 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 the 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 Subsidy Reforms (January 6, 2019). Available at SSRN: https://ssrn.com/abstract=3305126 or http://dx.doi.org/10.2139/ssrn.3305126

Hamed Ghoddusi (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

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

Economic Research Forum ( email )

Cairo
Egypt

Mohammad Morovati

Khatam University ( email )

Tehran
Iran

Nima Rafizadeh

affiliation not provided to SSRN

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