Dynamics of Fuel Demand Elasticity: Evidence from Subsidy Reforms
41 Pages Posted: 6 Jan 2019 Last revised: 20 Apr 2020
Date Written: January 6, 2019
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
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