The effect of adjusting the prices of commodity groups on the rural society with an emphasis on welfare indicators: A case study of Iran

Introduction: Identifying the behavior of households is essential for both suppliers and governments. It enables one to better plan for the sale of goods by identifying consumer needs and preferences and their response to change. It also helps to pursue different goals such as supporting low-income groups. The goal is to identify the consumption behavior of households. Accordingly, the questions that arise are ‘how have the welfare index, poverty, and income distribution changed over the years as to make the country experience inflation?’, ‘which commodity group has inflicted the most welfare loss on the household?’, and ‘what are the factors affecting the household welfare loss?’
In this study, in order to answer these questions, we focus only on the indicators of welfare, poverty and the distribution of rural household expenditures. Because of the lack of planning and development in the village, many problems have been created for the national territory. Biological problems in rural areas and the movement of rural population to cities not only increase the problems in the outskirts of cities but also lead to the prevalence of false jobs and inflation in cities, which is one of the most important problems of cities, especially in large cities in Iran. The advantage of this study over the previous ones, which often refer to the effect of price adjustment after the targeted subsidy policy, is the extent of the period under study and the simultaneous study of the most important welfare indicators. In this regard, this article is organized into four sections.
Methodology: In this research, household as a statistical unit and its consumption expenditures as research data are examined. The statistical body of the household budget contains household expenditure information related to eight commodity groups, which makes it very suitable for estimating demand functions. The price indices of the studied commodity groups have been obtained from the website of the Central Bank of the Islamic Republic of Iran and the Statistics Center of Iran. The prices of energy carriers have also been obtained from the energy balance sheet published by the Ministry of Energy. It should be noted that the individual price of energy carriers studied in this study after being converted into the same unit (barrel equivalent of crude oil) and weighted average (based on the share of each energy carrier) has become a single price as the price of energy carriers. The commodity groups studied in this study include food, housing, transportation and communications, healthcare and energy carriers. Energy carriers used by households in the fuel and lighting subgroups related to housing, water and sewage are available as fuel and lighting and include electricity, gasoline, natural gas, liquefied petroleum gas, kerosene, diesel and black oil.
This study investigated the effect of price adjustment of commodity groups (food, housing, energy carriers, health, transportation and other goods) on welfare, poverty and distribution of rural household expenditures in Iran in the period of 1988-2017. To measure the welfare cost of inflation by measuring consumer welfare changes, a formula was extracted for the compensatory changes in the framework of the near-ideal demand system (AIDS). The relative poverty line was calculated from the Gini coefficient with an emphasis on the nutritional approach and expenditure distribution.
Results and Discussion: The calculated indicators show that, with an increase (or a decrease) in inflation, the welfare losses increase (or decrease), and the highest welfare losses belong to the food commodity group, which has the largest share among household expenditures. The next stage is housing, transportation, healthcare, and energy carriers respectively. Also, with an increase (or a decrease) of inflation, the poverty line goes higher (or lower) and the expenditures of commodity groups become more inappropriate. Due to the increase in the inflation in the third period of this study (2010-2017), the government support policies have reduced the severity of welfare costs, and the distribution of rural household expenditures has become more appropriate than in previous periods.
Conclusion: According to the research findings, the following recommendations can be made to adopt appropriate policies to prevent the decline of consumer welfare:
- The effects of an economic policy should be examined and compared in the long run with the pre- and post-policy periods (in the present study, it is 1988-2017). Also, only one course of study (major in-country studies on the use of targeted subsidy policy) should not be the basis for conclusions.
- Given that the most negative welfare effects are related to the commodity groups that have a larger share in the household budget, the government support policies should focus on goods that have a larger share of the household budget.
- For commodities whose traction is less than one price, the policy of price increase alone is not suitable to reduce consumption; necessary policies and culture building should be used to reduce consumption.
- The government should adopt more specific and targeted policies regarding the equitable distribution of income and wealth, and these policies should be implemented in line with inflation control policies. In this case, the level of social welfare can increase. Therefore, the implementation of any policy that leads to a fair distribution of income increases welfare and reduces poverty.