The Distributional Effects of Gasoline Price Reform in Iran: Incremental Price Increases or One Large Hike?

The distributional effect on household expenditures is crucial in implementing an acceptable policy for fuel price reform. The motivation behind this paper is to evaluate the impact of gasoline price shock on urban, rural, and all Iranian household expenditures under two scenarios: The sudden pricing scenario, implemented using the standard input-output price model, and the incremental scenario, conducted with the assumption of government price control via a modified input-output price model. To this end, we use the ۲۰۱۶ input-output data for the Central Bank of Iran. The empirical results indicate that the Iranian household has experienced a progressive distributional impact on their welfare after the two mentioned gasoline price shock scenarios. In other words, the share of expenditure for the highest-income groups in urban, rural, and all Iranian households would increase; which we call the progressive effect. Unlike the high-income households, the groups with the lowest income also have a lower expenditure. However, the progressivity of distributional effects is different in the two mentioned scenarios. In the sudden price shock scenario, for all types of households, the progressivity effect is less than the incremental effect. At the same time, it reveals that the distributional impact of incremental gasoline price reform policy on the poor and medium-income households is compatible with a sudden gasoline price shock scenario in the short term. To reduce the long-term effects on the poor, it is recommended that gasoline price corrections should be based on an incremental pricing policy in line with the inflation of price-driven economic indicators.