An Analysis of the Effect of Subsidy Reform Induced' Energy Price' Risk on the Budget of Urban Households in Iran

This paper estimates the impact of energy price' risk on the budget of urban households in Iran due to the subsidy reform by estimating the expenditure' risks for nine parts of Iranian household expenditures. Moreover, the changes in the risks for different income deciles and the income and cost effects of changes in expenditures are calculated during the period of 1989- 2013. In this research, the energy expenditures of sample households are modeled as a simple function, in order to evaluate the welfare effects of energy price' structural reform. So, energy expenditures for sample households are a function of the cost (price) of energy. Then, by estimating the risk and standard deviation of energy expenditures, the effect of subsidy reform on the households' welfare can be analyzed. The results showed that the risk for the energy sector from 0.062 percent since 2009, one year before the execution of law on subsidy reform, reached 0.072 percent in 2011. The risk for food, clothing and footwear was not changed that much. The risk for all sectors, however, decreased in 2012, due to a sharp rise in inflation rate from 12.4 to 21.5 percent between 2010 and 2011. Such an increase, to some extent, has undermined the increase in energy prices due to the subsidy reform. The risk for lower-income deciles has been increased in the beginning years of implementation of subsidy reform, but the risk of high income deciles has been either fixed or slightly changed. It should be noted that in 2011, due to the increase in inflation rate, the risk for low-income households decreased to some extent. Finally, the income and cost effects of changes in energy expenditures have put the household energy expenditures at risk and the risk for all households of the society, especially low-income households, has been increased.