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Fiscal Reforms in General Equilibrium: Theory and an Application to the Subsidy Debate in Iran

Author

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  • Gahvari Firouz

    (University of Illinois at Urbana-Champaign)

  • Taheripour Farzad

    (Purdue University)

Abstract

This paper estimates the pattern of consumer expenditures in Iran in an attempt to measure the welfare cost of price subsidies in that country and shed light on possible fiscal reforms. We use the Quadratic Almost Ideal Demand System (Banks et al. (1997)) as our framework for estimation. We show that the general equilibrium fiscal interaction effects play a crucial role in determining the amount the government saves by eliminating the price subsidy of a particular good. Interestingly, eliminating price subsidies on utilities saves the government little by way of revenues and is welfare reducing. Comparing the gains for non-marginal with marginal reforms a la Ahmad and Stern (1984), we also show that the two approaches may not necessarily recommend the same reform.

Suggested Citation

  • Gahvari Firouz & Taheripour Farzad, 2011. "Fiscal Reforms in General Equilibrium: Theory and an Application to the Subsidy Debate in Iran," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-54, June.
    • Handle: RePEc:bpj:bejeap:v:11:y:2011:i:1:n:36
    DOI: 10.2202/1935-1682.2722
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    Cited by:

    1. Stéphane Gauthier & Taraneh Tabatabai, 2019. "How incentives matter? An illustration from the targeted subsidies reform in Iran," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 52(1), pages 97-125, January.
    2. Mamipour, Siab & Salem, Ali Asghar & Sayadi, Mohammad & Azizkhani, Masoumeh, 2023. "Retail gasoline pricing in a subsidized energy market: An empirical analysis from AIDS model for Iran," Energy Policy, Elsevier, vol. 183(C).
    3. Shehabi, Manal, 2020. "Diversification effects of energy subsidy reform in oil exporters: Illustrations from Kuwait," Energy Policy, Elsevier, vol. 138(C).
    4. Stephane Gauthier & Taraneh Tabatabai, 2017. "How incentives matter ? An illustration from the Targeted Subsidies reform in Iran," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01542799, HAL.
    5. Haqiqi, Iman & Yasharel, Sepideh, 2018. "Removing Fossil Fuel Subsidies to Help the Poor," MPRA Paper 95907, University Library of Munich, Germany.
    6. Aghababaei, Mohammad Ebrahim, 2019. "General Equilibrium Resource Elasticity in an Open Resource-Abundant Economy," MPRA Paper 97851, University Library of Munich, Germany.

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