The Effect of Omitting Subsidies in Agriculture and in Its Related Industries on Households and on the Economic Variables: An Analysis in the Framework of General Equilibrium

The effects of omitting production subsidies from agricultural sector and the related industries in Iran are explored in this paper. To simulate the effects of this policy, a Computable General Equilibrium (CGE) model for Iran economy was developed and the latest input- output table published in 2001 and the accompanying information regarding national accounts was used as database in the form of social accounting matrix (SAM). The simulation results indicate that omission subsidies affect urban households more than they affect rural households, i.e. urban households’ income and expenditure decline more than they do for rural’. Therefore, economic inequalities between urban and rural households are apt to decrease. Omission of production subsidies leads to increased production costs as well as increased producer prices of commodities and services which in turn results in inflation and a decrease in employment. On the other hand, implementing this policy leads to an increase in urban household's saving as well as and government's savings which provides investment opportunities in the economy. The overall results indicate that the adverse effects of removing subsidies from agricultural sectors and the related industries are not substantial and could be recommended.