Analysis of the Impact of Higher Energy Prices on Residential Consumers Welfare in Iran Using the AIDS System

This paper analyzes the impact of increased Energy Prices on welfare of Residential consumers، using an almost Ideal demand system (AIDS). We calculate the elasticity and changes in welfare under scenarios of 2، 3، 4، 5، and 6 fold increases in prices using Compensation Variations (CV) and Equivalent Variation (EV) measures for the period 1974 to 2009. The results of the Marshalian and expenditure elasticities indicate that Natural Gas، Electricity and Oil (Kerosene and Gas Oil) have negative self and cross elasticity of prices. Natural Gas and Electricity have the quality of «luxury» goods. Oil ha the quality of an Essential good. All three energy sources have a net substitute relationship and degree of substitution of Natural Gas and Oil relative to Natural Gas Electricity is higher than the degree of substitution of Electricity and Oil relative to Oil and Natural Gas. The computation of CV measures and comparison with the current amount of subsidy payments by government to residential energy consumers show that the loss in welfare of consumers in 2009 is compensated، if prices increase 6 folds. But the consumers experience a loss in welfare in April 2012، if prices are increased 6 fold.