The Effects of Increasing Food Commodities Prices on the Welfare and Poverty of Iranian Urban Households

Measuring changes in economic welfare has been known as one of the practical economic issues. So, this study aimed to calculate the welfare changes resulted from the changes in Iran food prices. To accomplish such task, welfare macroeconomic theory, compensating variation (CV) criteria, household income and expenditure data of Iran in 2014 were used. The purpose of this study is to provide scientific solutions to assess consumer behavior and estimate the price elasticity of goods. Compensating variation represents the net income that must be given to household in order to restore them to the utility level they have been before the price changes. The price change is negative after an increase because it is expressed as a central authority’s expenditure to restore the household to the pre-price change utility level. In order to estimate compensated variation, at first household's demand system should be estimated. So, the parameters of the demand system are estimated by applying nonlinear seemingly unrelated regression to the system of eight share equations. Parameter estimates, summarized in form of income and price elasticities, provide more clear understanding of household food consumption behavior in 2014 and also these parameter estimates provide a theoretically consistent model of household food demand that can be used to evaluate the welfare impressions of food price increases. Uncompensated own price elasticities are calculated. Due to the absolute value of the coefficients of elasticity, it can be stated that for urban households the demand for all selected goods, other than oil and fat, is not elastic to price changes. Investigation of the non-compensatory cross-sectional for cereals indicates the existence of a complementary relationship between cereals and most foods. Meanwhile, the most and the least complete complementary relationship is between cereals- meat and cereals - sugar. In other words, urban households after the inclusion of cereals in their basket regard this food as a supplement to their food basket. Investigating cross-sectional elasticity of meat in urban households revealed a substitution relationship between meat, dairy, oil and fat, fruits, vegetables and sugar. According to the absolute value of cross-sectional, it can be stated that there is a weak substitution relationship between the desired foods. The positive sign of cross-sectional elasticity implies an increase in meat consumption in urban households as a result of rising food prices. Also, the relationship between meat and cereals with respect to the negative elasticity is a Complementary relationship. Therefore, a one- percent increases in the price of cereals, assuming that the other requirements for meat demand are fixed, leads 0.023% to –percent decrease in meat demand. Based on the results of Table 2, non-compensatory cross-sectional of dairy products indicates the existence of complementary relationship between dairy products and cereals. Other cross-sectional elasticities for dairy products are positive and indicate the substitution relationship of dairy products with other foods, including meat. The highest ratio of substitution to dairy is tea and coffee with cross-sectional elasticity equals 0.415%. Therefore, urban households, after adding dairy products in their basket, add tea and coffee as a substitute for dairy products to their food basket. An examination of cross-sectional elasticity for oil and fat indicates the existence of a complementary relationship between oil and fat with fruits, tea and coffee. In other words, urban households after adding fat and oil in their basket will add fruits, tea and coffee as a complement to their basket, which means increasing the consumption of fruits, tea and coffee along with fat and oil consumption for urban households.
Results of current study indicate of high income elasticity for cereals due to the variety of goods as well as existence of numerous types of cultivars processed in this kind of foods. So this kind can be considered as luxury especially for the types of processed products. The elasticities of other foods are positive and smaller than one. So these foods are considered as essential commodities for urban households.
In the next section, three scenarios including 15, 25 and 50 percent increase in food prices are considered and the impacts of changes in food prices on urban household expenditures are calculated by means of the welfare index of compensatory changes for the eight main food groups. Results reveal that for urban households the average consumption of meat is higher than other food stuffs. After meat, the highest consumption expenditure is allocated to cereals with the average consumption expenditures calculated for urban households s 892,000 Rials. In other words, these two groups of foods including cereals and meat are among the main commodities in the household food basket. Considering the importance and share of food commodities in the consumption basket of households, this study examines the effect of rising prices of edible chips on welfare and consequently on poverty of urban households. In this regard, the quadratic ideal demand system has been applied to estimate the demand for household food commodities and the criterion of compensating variation has been used as the welfare measure The results show that, given the absolute value of the coefficients of own elasticity, it can be stated that for these households demand for all selected goods other than oil and fat is inelastic in response to price changes. Therefore supposed that foodstuffs have a high share of the households basket, it is necessary to provide financial support to maintain the welfare of households and pay equivalent compensatory changes calculated to retain the desirability of households.