Welfare Effects of Energy Subsidy Reduction in Iranian Agriculture Sector

Energy is considered as an important input for agricultural products. A decrease in energy subsidy and its demand reduces agricultural outputs and raises the production costs. Changes in production and costs may significantly affect welfare of the agricultural producers. The main objective of this study was to analyze the impact of increased energy prices (reduction in the subsidy) on the agricultural producers as well as the government expenditure. In order to achieve the objective, production factor demands (labor, capital and energy) were estimated. Then, impact of increased energy price (decrease in subsidy) on its demand was analyzed. Using production function, the impact of decreased energy consumption on agriculture production was estimated. Using the demand function for agricultural products, the impact of decreased energy consumption on the agricultural prices was estimated. The study groups to analyze the welfare were agricultural producers and the government. The welfare impact of reduced energy subsidy includes a change in the production value, in the production costs and the government expenditure allocated to the energy subsidy in the agricultural sector. The results showed that for the short run an increase in energy prices raised energy cost, however the total production costs tended to decrease due to robust reduction in the agricultural production. Increased energy price results in an increase in the production prices which is beyond the decrease in the production and the decrease in the government expenditure. In the long run, increase in the energy costs and decrease in the government expenditure tended to progress rapidly. However, in the long run compared with the short run, due to the increased production and the decrease in the output price a lower increase in the production value occurs. The welfare analysis showed an increase in the welfare of the study groups, however, that was more considerable in the short run compared with the long run. Supporting the agricultural producers with credit facilities and technology improvement were suggested as the effective policies.