Analysis of the Welfare Effects of Cash Subsidies in the Iranian Economy

This study examines the welfare effects of cash subsidies on three groups of households and market participants, namely subsidy-receiving households, non-subsidy-receiving households, and retailers, over the period 2015–2023. First, using a partial equilibrium model that incorporates subsidy-receiving and non-subsidy-receiving households, the price elasticity with respect to cash subsidies was estimated. Subsequently, changes in consumer surplus and producer surplus with respect to cash subsidies were calculated so that they could be interpreted based on the elasticities and measurable parameters. Finally, the required parameters and elasticities were estimated using econometric models, and the proposed model was simulated. The results of this study indicate that cash subsidies may lead to an increase in the price index, such that a one-percent increase in cash subsidies may increase the price index by 0.05 percent. Measurement of changes in consumer welfare surplus and producer welfare surplus indicates that cash subsidies have had heterogeneous welfare consequences across the groups under study. Subsidies have increased the welfare of subsidy-receiving consumers and producers, while non-subsidy-receiving consumers have incurred welfare losses. Therefore, the welfare effects of subsidies are redistributive in nature and, through the price mechanism, distribute benefits and costs among different economic groups. These findings indicate that analyzing subsidy policies without considering their price effects and market structure may result in an incomplete assessment of their welfare consequences.