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Fiscal Reforms in General Equilibrium: Theory and an Application to the Subsidy Debate in Iran


  • Gahvari Firouz

    () (University of Illinois at Urbana-Champaign)

  • Taheripour Farzad

    () (Purdue University)


This paper estimates the pattern of consumer expenditures in Iran in an attempt to measure the welfare cost of price subsidies in that country and shed light on possible fiscal reforms. We use the Quadratic Almost Ideal Demand System (Banks et al. (1997)) as our framework for estimation. We show that the general equilibrium fiscal interaction effects play a crucial role in determining the amount the government saves by eliminating the price subsidy of a particular good. Interestingly, eliminating price subsidies on utilities saves the government little by way of revenues and is welfare reducing. Comparing the gains for non-marginal with marginal reforms a la Ahmad and Stern (1984), we also show that the two approaches may not necessarily recommend the same reform.

Suggested Citation

  • Gahvari Firouz & Taheripour Farzad, 2011. "Fiscal Reforms in General Equilibrium: Theory and an Application to the Subsidy Debate in Iran," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-54, June.
  • Handle: RePEc:bpj:bejeap:v:11:y:2011:i:1:n:36

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    References listed on IDEAS

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    11. Lawrence H. Goulder & Roberton C. Williams III, 2003. "The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 898-927, August.
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    Cited by:

    1. Stephane Gauthier & Taraneh Tabatabai, 2016. "How incentives matter ? An illustration from the Targeted Subsidies reform in Iran," Working Papers halshs-01542799, HAL.
    2. Stephane Gauthier & Taraneh Tabatabai, 2017. "How incentives matter ? An illustration from the Targeted Subsidies reform in Iran," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01542799, HAL.

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