Computable General Equilibrium Analysis of the Welfare Effects of Reform of Energy Carriers’ Subsidies: Hicksian Equivalent Variation Index

Abstract

Measuring the welfare effects of energy subsidy reform is one of the most essential steps in determining the conditions and scenarios of energy price reform. Therefore, the main goal of this article is to survey how energy price reform affects the welfare of rural and urban households’ income deciles. This research uses the standard computable general equilibrium model based on legislated scenarios approved by Parliament in 2010. In addition, the supportive and income redistribution policies resulting from energy price reform are simulated and analyzed. The results show that rising energy prices leads to reduction in welfare of all urban and rural households especially in the lower income deciles. In addition, increasing energy prices causes more drop in the welfare of rural households in comparison with urban ones. Therefore, the supportive and income redistribution policies resulting from energy price reform under various redistribution scenarios considerably compensate the lost welfare of households.

Keywords

• computable general equilibrium model
• subsidy reform
• energy carrier’s price
• welfare
• hicksian equivalent variation