An Investigation on Allocative Efficiency of Targeting Subsidies in Iranian Manufacturing Sector:  Case Study of Price Distortions in Input Markets

Keshavarz Haddad, Gholam Reza; Firoozan, Toheed; Sadeghi Soghdel, Hosein

doi:10.22096/esp.2012.26175

An Investigation on Allocative Efficiency of Targeting Subsidies in Iranian Manufacturing Sector: Case Study of Price Distortions in Input Markets

Document Type : Original Article

Authors

Gholam Reza Keshavarz Haddad ¹

Toheed Firoozan ²

hosein Sadeghi Soghdel ³

¹ Associate Professor of Economics, Sharif University of Technology

² Faculty member of University of Economic Sciences

³ development economics department management and economics faculty Tarbiat Modares university Tehran

10.22096/esp.2012.26175

Abstract

In Iran’s economy, a high volume of energy subsidies along with the other price distortions has caused inefficiencies in the resource allocation, through distortions in the relative prices of inputs and commodities. This study aims at the examination and estimation of cost burdens incurred which stems from the allocative inefficiency of price distortion in energy carriers pricing in Iran’s industry sector. We estimated allocative inefficiency using a shadow cost function model based on a system of nonlinear equations which includes a price distortion equation. The cost model is estimated by the econometric method of Iterated Seemingly Unrelated Regression Equations (ISURE) and ‍Cross Section data-set of Iran’s industries. Our results show that, at the whole industry level, the costs of allocative inefficiency caused by all inputs’ price distortions are amounted to 45% of production costs of the firms in the industry sector. The extents of allocative inefficiency which are caused solely by distortions in the energy prices are equal to 34% of the production costs. Nonetheless, energy share of production costs increases to 10% from 5.7% actual level considering substitutionary and complementary relations among inputs after removal of the whole price distortion of energy input.

Keywords

Input Price

Energy Subsidies

Allocative Inefficiency

Shadow Cost Function

Manufacturing Sector

ISUR

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