Evaluation of Compensated Variation in Rising Commodity Prices: The Case of Iranian Urban Households

The objective of this study is to analyze the impact of rising commodity prices (bread, milk, water, electricity, and gas) on the welfare of urban household income. For this purpose, the compensating variation formulation is extracted in Almost Ideal Demand System (AIDS) framework. Moreover, the demand system is calculated based on AIDS parameters and applying SUR method. It is computed for three main income categories with using, income and budget data during the period 2010- 2013. The results suggest that compensating variation is positive for urban households, which means that the rising prices reduce urban household welfare in this period. The results also show that percentage of reduction in welfare due to rising commodity prices on lower-income groups is more than middle and higher-income groups.