The Effects of Price Reform of Energy Carriers on Basic Metal Sector: A Case Study of Qom Province

The main purpose of this study is to estimate the effects of price reform of energy carriers on basic metal cost function in Qom province, due to targeted subsidies law. Applying panel data, this article aims to derive own- and cross-price elasticities as well as elasticity of factor substitution through a translog cost function. To do this, we collect all relevant data of basic metal industry in Qom province, considered as energy intensive one, during 2003-2014. Energy price, wage, capital price (profit rate) and quantity of product are chosen as independent variables for the total cost (dependent variable). The result shows that the own-price elasticities of energy, labor, capital are respectively -0.2, 0.46 and -0.13. The negative Allen elasticity between energy and labor implies that the price reform causes an increase in the unemployment rate, while the positive Allen elasticity of substitution between energy and capital suggests that this industry should evolve toward one with more capital-intensity. The feasibility of such substitution requires that the grounds for technological transfer, financial development and the improvement in global interaction be prepared.