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“Welfare impact of electricity subsidy reforms in Pakistan: A micro model study”

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  • Khalid, Syed Adnan
  • Salman, Verda

Abstract

Electricity subsidies in developing countries have always been debated in economics circles. Despite their popular appeal of providing relief to the poor, the research has proven otherwise. They increase the magnitude of deadweight loss and taper consumer welfare. However, complete withdrawal of a subsidy will make electricity unaffordable for the underprivileged. Therefore, in the context of developing countries, there is a need to determine the optimal level of subsidy, which will have the least economic impact and benefit the maximum number of users. Pakistan has been marred by deep energy crises and the government is forced to provide very large subsidies for electricity. Using Pakistan as a case study, this study uses a uniform and non-uniform price increase to determine the optimal level of electricity subsidies. This study employs a micro-model technique for the calculation of deadweight and welfare losses when the price of electricity is increased uniformly or non-uniformly across different consumption groups. This study also introduces a targeted subsidy approach for curbing the mounting deadweight loss due to immense electricity subsidies. Our research has identified that the targeted subsidy approach not only generates fiscal savings but also improves the welfare of the vulnerable in society.

Suggested Citation

  • Khalid, Syed Adnan & Salman, Verda, 2020. "“Welfare impact of electricity subsidy reforms in Pakistan: A micro model study”," Energy Policy, Elsevier, vol. 137(C).
    • Handle: RePEc:eee:enepol:v:137:y:2020:i:c:s0301421519306846
    DOI: 10.1016/j.enpol.2019.111097
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    References listed on IDEAS

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    Cited by:

    1. Jamil, Muhammad Hamza & Ullah, Kafait & Saleem, Noor & Abbas, Faisal & Khalid, Hassan Abdullah, 2022. "Did the restructuring of the electricity generation sector increase social welfare in Pakistan?," Renewable and Sustainable Energy Reviews, Elsevier, vol. 157(C).
    2. Proskuryakova, Liliana & Starodubtseva, Alena & Bianco, Vincenzo, 2020. "Modelling a household tariff for reducing sectoral cross-subsidies in the Russian power market," Energy, Elsevier, vol. 213(C).
    3. Syed Hasan & Odmaa Narantungalag, & Martin Berka, 2022. "The intended and unintended consequences of large electricity subsidies: evidence from Mongolia," Discussion Papers 2202, School of Economics and Finance, Massey University, New Zealand.
    4. Afia Malik, 2020. "Circular Debt—an Unfortunate Misnomer," PIDE-Working Papers 2020:20, Pakistan Institute of Development Economics.
    5. Ruddy Kaharudin Gobel & Bambang Shergi Laksmono & Martani Huseini & Mia Siscawati, 2024. "Equity and Efficiency: An Examination of Indonesia’s Energy Subsidy Policy and Pathways to Inclusive Reform," Sustainability, MDPI, vol. 16(1), pages 1-26, January.
    6. Razzaq, Asif & Sharif, Arshian & Yang, Xiaodong & Dogan, Eyup, 2024. "Influence mechanism of electricity price distortion on industrial green transformation: A spatial analysis of Chinese regions," Energy Economics, Elsevier, vol. 130(C).
    7. Zhen Liu & Assem Abu Hatab, 2023. "Assessing stakeholder engagement in public spending, green finance and sustainable economic recovery in the highest emitting economies," Economic Change and Restructuring, Springer, vol. 56(5), pages 3015-3040, October.
    8. Boudekhdekh, Karim, 2022. "A comparative analysis of energy subsidy in the MENA region," MPRA Paper 115275, University Library of Munich, Germany.
    9. Ilyas, Rubina & Hussain, Khadim & Ullah, Mehreen Zaid & Xue, Jianhong, 2022. "Distributional impact of phasing out residential electricity subsidies on household welfare," Energy Policy, Elsevier, vol. 163(C).
    10. Jan, Muhammad Zain & Ullah, Kafait & Abbas, Faisal & Khalid, Hassan Abdullah & Bajwa, Tariq M., 2023. "Barriers to the adoption of social welfare measures in the electricity tariff structure of developing countries: A case of Pakistan," Energy Policy, Elsevier, vol. 179(C).
    11. Wang, Yao & Lin, Boqiang, 2021. "Performance of alternative electricity prices on residential welfare in China," Energy Policy, Elsevier, vol. 153(C).
    12. Rubina Ilyas & Hidayat Ullah Khan & Abdur Rauf, 2022. "Welfare Impacts of Policy Reforms: A Case of Electricity Subsidies in Pakistan," International Journal of Energy Economics and Policy, Econjournals, vol. 12(3), pages 41-49, May.
    13. Xu, Shang & Zhang, Jun, 2023. "The welfare impacts of removing coal subsidies in rural China," Energy Economics, Elsevier, vol. 118(C).
    14. Aslam, Misbah & Ahmad, Eatzaz, 2023. "Untangling electricity demand elasticities: Insights from heterogeneous household groups in Pakistan," Energy, Elsevier, vol. 282(C).

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    More about this item

    Keywords

    Consumer welfare; Deadweight loss; Uniform pricing; Non-uniform pricing; And subsidies;
    All these keywords.

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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