Fuel Subsidies, Smuggling, and Income Inequality

29 Pages Posted: 7 Sep 2021 Last revised: 6 May 2022

See all articles by Hosein Joshaghani

Hosein Joshaghani

Tehran Institute for Advanced Studies, Khatam University

Mohammad Morovati

Khatam University

Saeed Moshiri

Saint Thomas More College University of Saskatcehwan

Nima Rafizadeh

HEC Montreal

Multiple version iconThere are 2 versions of this paper

Date Written: September 6, 2021

Abstract

Fuel subsidies lead to economic distortions including excess consumption because of changes in relative prices. They also create an incentive for smuggling to neighbouring countries where price differentials are significant. Notwithstanding myriad studies on various economic impacts of fuel subsidies, research on smuggling fuel is limited. In this paper, we first use a model to specify the demand for fuel smuggling and then estimate its impacts on income distribution in provinces across the borders. We use fuel prices in the neighbouring countries and distance from the borders as the sources of identification to separate smuggling from the domestic demand. We then estimate monthly profit of smuggling in each region and its impact on income distribution across the borders. The data covers monthly gasoline and diesel sales for 160 distribution regions in Iran, a country with highly subsidized fuel policy, for the period 2005-2014. The results indicate that on average 25 percent of total fuel consumption in Iran has been smuggled to its neighbouring countries for the period of study. Our findings show that one percent increase in smuggling profit has reduced the Gini coefficient by 0.68 to 1.39 percent. We discuss some policy implication of our findings.

Keywords: Fuel Subsides, Smuggling, Income Inequality, Gini Index, Iran

JEL Classification: C23, E25, E26, Q41

Suggested Citation

Joshaghani, Hosein and Morovati, Mohammad and Moshiri, Saeed and Rafizadeh, Nima, Fuel Subsidies, Smuggling, and Income Inequality (September 6, 2021). Available at SSRN: https://ssrn.com/abstract=3918068 or http://dx.doi.org/10.2139/ssrn.3918068

Hosein Joshaghani

Tehran Institute for Advanced Studies, Khatam University ( email )

Iran
19557751 (Fax)

HOME PAGE: http://teias.institute/faculty/joshaghani/

Mohammad Morovati

Khatam University ( email )

Tehran
Iran

Saeed Moshiri

Saint Thomas More College University of Saskatcehwan ( email )

1437 College Dr
Saskatoon, Saskatchewan S7N 0W6
Canada

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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