The Impact of Targeted Subsides of Basic Goods on the Household Welfare: A Case Study of the City of Isfahan

One of the policies in developing countries and even in developed ones is paying subsidies and adopting a profitable supporting method in this regard. However, payment of subsidies, such as subsidies on basic goods, has certain disadvantages. Consequently, developed and developing countries prefer to have a system of targeted subsidy payment. This tendency has had influences on welfare of families.
This article examines the effects of targeted subsidies of basic goods (e.g. bread and grains, meat, dairy products, eggs of birds, oil and fat, fruits and dried fruits, vegetables and cereals, and sweets) on the welfare of families in urban regions of Isfahan, representing the vulnerability order of income deciles due to the variation of foodstuff prices. For this reason, the theory of demand and especially the seemingly unrelated regression of the linear expenditure system are used to examine the demand equations and then standards of “Compensating Variation” and “Equivalent Variation” for evaluation of consumers’ welfare variation in Isfahan.
An estimate of the demand system is calculated based on expense-income of the urban household in Isfahan during the period 2004–2011. The results obtained from the calculation of “Compensating Variation” and “Equivalent Variation” in four urban household commodity groups in Isfahan province in 2011 show a reduction in the household welfare after implementing targeted commodity subsidies. Furthermore, according to the existing descriptive data of the targeted subsidies program, urban families in Isfahan experienced welfare stagnation in 2011. In that year, the first income decile was the most damaged decile because of the increase in the prices.