Gasoline pricing and its consequences on the absolute and relative poverty of urban households in Iran

Pricing of gasoline and the necessity of reforms in this area are perpetual concerns among experts and policymakers of the country. By allocating a large volume of subsidy to gasoline, not only has the main goal of supporting the poor classes of the society remained unrealized, but it has also created various problems such as excessive consumption, smuggling, and the spread of pollution. In this study, an effort is made to propose a new pricing policy for gasoline with the aim of reducing poverty in the society. In this scenario, a certain allocation (60 liters per month at a fixed price of 15000 Rials) will be preserved, and only non-allocated gasoline will be subject to a floating price and a 5% tax based on consumption. This study introduces a scenario and examines its effects on various types of poverty (absolute and relative) compared to the current situation.

The gasoline consumption data of 78255 households residing in the provinces of the country during the years 2017-2020 were collected and categorized into four groups (less than 60 liters, 60 to 80 liters, 80 to 120 liters, and more than 120 liters). This was based on the view that the amount of gasoline consumption is a part of the household income. The data were derived from expenditure surveys conducted by the Statistical Center of Iran. By employing an ideal demand system model and seemingly unrelated regression method, the share of nine selected commodity groups from the household consumption basket, including (food, clothing and footwear, housing, water, sewage, fuel, lighting, health and medical services; gasoline; transportation excluding gasoline; cultural and recreational services, prepared foods, hotels, and restaurants, and other goods and services) were examined while taking into account demographic variables including household size, gender, age, marital status, employment status, education, and home ownership of the heads of households. Price and income elasticities were extracted, the Compensating Variation (CV) measure of changes was calculated, and household cost information, poverty (absolute and relative) simulation and estimation were conducted, assuming the implementation of the proposed scenario.

The income elasticity of gasoline demand is less than one for all consumption categories. This elasticity has the highest value for consumption categories of less than 60 liters per month (the monthly allocation) and indicates a higher sensitivity of this category compared to other gasoline consumption categories. With the increase of income, the gasoline consumption of this group, as it has not yet reached its saturation point, increases more than other groups. For non-rationed consumption, there is a positive income elasticity trend alongside an increase in gasoline consumption, indicating that gasoline consumption also increases with increasing income. The elasticity of gasoline price showed that this commodity is essential for households, and an increase in its price has no significant effect on their consumption. Nevertheless, gasoline consumers within the monthly rationed range (60 liters) have a stronger reaction to price changes, and any price change affects the basic needs of households belonging to this consumption category. Households belonging to the consumption category of more than 120 liters have the lowest price elasticity, and it is necessary to change the pricing method to make them sensitive to the price of gasoline. Implementing the proposed scenario and imposing taxes on the consumption exceeding the allocated ration for households will result in changes in the welfare of households based on their level of consumption. To estimate the Compensating Variation (CV), the percentage change in the allocated budget share of the commodity group, the approximate relative price changes, and Hicksian price elasticity (compensation) were calculated. By implementing the policy of imposing taxes on excess consumption, households that consume between 60 to 80 liters of gasoline monthly will receive an additional 800,467 Rials for their welfare, and households with consumption between 80 to 120 liters and over 120 liters monthly will lose 5,843,089 Rials and 21,361,290 Rials of welfare, respectively. After adding and subtracting the calculated welfare to household expenses, simulations were performed, and poverty (absolute and relative) was recalculated. The results showed that adding welfare to low-consumption households reduces the poverty rate compared to the current situation. Among the demographic variables examined, except for the virtual age variable, which has an inverse relationship with gasoline consumption, the other demographic variables including household size, home ownership, gender, education, employment, income ownership, and marital status of the heads of households have significant and direct relationships with gasoline consumption.

Conclusion and Policy Implications:

 Currently, the policy of stabilizing gasoline prices in a two-tiered system (allocated and non-allocated prices) is being implemented, which will not be a logical solution in inflationary conditions. A solution needs to be proposed to partially amend and control the gasoline consumption pattern while taking into account the social-political dimensions of pricing reforms. Therefore, in this study, the scenario of non-allocated gasoline pricing proportional to the level of consumption was analyzed as a proposed solution. The results showed that implementing the proposed scenario leads to a reduction in poverty (absolute and relative). This finding has a significant impact on the decision-making of policymakers in order to improve the level of welfare in the society.