Modeling Agricultural Sector Energy Demand in Iran: An Application of Normalized Quadratic Functional Form

In this paper, we employ the locally flexible normalized quadratic (NQ) cost function to estimate the demand for electricity, gasoil, and kerosene in the agricultural sector of Iran. We use the price and quantity of the forenamed energy resources being consumed in the agricultural sector between the years 1971 to 2017. To provide credible results, consistent with microeconomic theories, we examine and impose the regularity conditions, namely, we examine the positivity and monotonicity of the cost function and impose curvature. We find that own-price elasticities are negative, income elasticities are positive, and Morishima elasticities of substitution are in general positive, and all elasticities are generally statistically significant. An exception is electricity which does not provide statistically significant own-price and income elasticities and cannot easily be replaced by the other energy inputs.