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How price inelastic is demand for gasoline in fuel-subsidizing economies?

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  • Arzaghi, Mohammad
  • Squalli, Jay

Abstract

In recent years, governments that have historically subsidized domestic fuel consumption face an ever-growing challenge in maintaining fuel subsidies and have embarked on subsidy reform. This paper estimates the price and income elasticity of demand for gasoline in countries where fuel prices are government-subsidized. We make use of biennial panel road-sector data for 32 countries over the 1998–2010 period and find demand for gasoline to be price inelastic both in the short run and long run. We estimate the short-run price and income elasticities at −0.05 and 0.16 and the long-run price and income elasticities at −0.25 and 0.81, respectively. It is our contention that concerned governments should play an active role in identifying and committing to a road map to progressively abandoning fuel subsidies. They should also not be discouraged by relatively small consumption corrections in the short run. A reduction in subsidies can eventually release considerable amount of resources for more crucial and potentially growth-enhancing public services such as education and health.

Suggested Citation

  • Arzaghi, Mohammad & Squalli, Jay, 2015. "How price inelastic is demand for gasoline in fuel-subsidizing economies?," Energy Economics, Elsevier, vol. 50(C), pages 117-124.
  • Handle: RePEc:eee:eneeco:v:50:y:2015:i:c:p:117-124
    DOI: 10.1016/j.eneco.2015.04.009
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    7. Ehrlich, Lars & Wolf, André, 2015. "Determinanten und Risiken der Energiepreisentwicklung und ihre Implikationen für den städtischen Verkehr: Studie für die Hamburger Hochbahn AG," HWWI Policy Papers 93, Hamburg Institute of International Economics (HWWI).
    8. Lucas W. Davis, 2017. "The Environmental Cost of Global Fuel Subsidies," The Energy Journal, International Association for Energy Economics, vol. 0(KAPSARC S).
    9. Burke, Paul J. & Batsuuri, Tsendsuren & Yudhistira, Muhammad Halley, 2017. "Easing the traffic: The effects of Indonesia’s fuel subsidy reforms on toll-road travel," Transportation Research Part A: Policy and Practice, Elsevier, vol. 105(C), pages 167-180.
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    13. Lin, Boqiang & Li, Zhensheng, 2021. "Does natural gas pricing reform establish an effective mechanism in China: A policy evaluation perspective," Applied Energy, Elsevier, vol. 282(PA).
    14. Ghoddusi, Hamed & Morovati, Mohammad & Rafizadeh, Nima, 2022. "Dynamics of fuel demand elasticity: Evidence from Iranian subsidy reforms," Energy Economics, Elsevier, vol. 110(C).
    15. Balta-Ozkan, Nazmiye & Le Gallo, Julie, 2018. "Spatial variation in energy attitudes and perceptions: Evidence from Europe," Renewable and Sustainable Energy Reviews, Elsevier, vol. 81(P2), pages 2160-2180.
    16. Mensah, Justice Tei & Marbuah, George & Amoah, Anthony, 2016. "Energy demand in Ghana: A disaggregated analysis," Renewable and Sustainable Energy Reviews, Elsevier, vol. 53(C), pages 924-935.
    17. Steven Parker, 2020. "Gasoline Demand in Middle-Income Countries," Economics Bulletin, AccessEcon, vol. 40(4), pages 2790-2801.
    18. Atalla, Tarek N. & Gasim, Anwar A. & Hunt, Lester C., 2018. "Gasoline demand, pricing policy, and social welfare in Saudi Arabia: A quantitative analysis," Energy Policy, Elsevier, vol. 114(C), pages 123-133.
    19. Aloisio S. Nascimento Filho & Hugo Saba & Rafael G. O. dos Santos & João Gabriel A. Calmon & Marcio L. V. Araújo & Eduardo M. F. Jorge & Thiago B. Murari, 2021. "Analysis of Hydrous Ethanol Price Competitiveness after the Implementation of the Fossil Fuel Import Price Parity Policy in Brazil," Sustainability, MDPI, vol. 13(17), pages 1-12, September.
    20. Majidpour, Mehdi, 2022. "Policy lessons from the execution of fuel dual-pricing: Insights for fuel-subsidizing economies," Energy, Elsevier, vol. 247(C).
    21. Ghoddusi, Hamed & Morovati, Mohammad & Rafizadeh, Nima, 2019. "Foreign Exchange Shocks and Gasoline Consumption," Energy Economics, Elsevier, vol. 84(C).
    22. Bah, Muhammad Maladoh & Saari, M. Yusof, 2020. "Quantifying the impacts of energy price reform on living expenses in Saudi Arabia," Energy Policy, Elsevier, vol. 139(C).
    23. Javid Suleymanli & Ilkin Mammadov & Fariz Ahmadov & Tabriz Aliyev, 2022. "Investigation of the Relationship Between Fuel Prices and Fuel Consumption in Turkey," International Journal of Energy Economics and Policy, Econjournals, vol. 12(6), pages 473-480, November.
    24. Dennis, Allen, 2016. "Household welfare implications of fossil fuel subsidy reforms in developing countries," Energy Policy, Elsevier, vol. 96(C), pages 597-606.
    25. Jeyhun Mikayilov & Fred Joutz & Fakhri Hasanov, 2019. "Gasoline Demand in Saudi Arabia: Are the Price and Income Elasticities Constant?," Discussion Papers ks--2019-dp81, King Abdullah Petroleum Studies and Research Center.

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    More about this item

    Keywords

    Gasoline demand; Fuel subsidies; Elasticity;
    All these keywords.

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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