Retail gasoline pricing in a subsidized energy market: An empirical analysis from AIDS model for Iran

Abstract

The prevailing gasoline pricing policy in Iran has traditionally been the fixed-price policy, where both rationed and non-rationed prices are set below the free-market prices. This long-standing subsidy policy has led to excessive energy consumption, fuel smuggling, and environmental concerns. However, efforts to reform these subsidies have faced social unrest due to abrupt price increases. To address these issues, we propose a new gasoline pricing policy that incorporates socio-economic factors using the AIDS model. We have categorized gasoline consumption into four groups: less than 60 L (current ration), 60 L–80 L, 80 L–120 L, and more than 120 L per month. Results shows that the price elasticity for the 60 L–80 L group is the highest (−0.94), while it is lowest for the above 120 L group (−0.48). Therefore, we recommend avoiding price increases for groups consuming below 80 L per month to prevent social unrest. Also, we suggest implementing a tax rate of 5% for consumption above the current ration. Under the proposed policy, the non-rationed price of gasoline will vary between the ration price and the Persian Gulf FOB price, depending on consumption levels. This approach ensures that higher levels of gasoline consumption will be associated with fewer subsidies and welfare benefits, and vice versa.