Is fertilizer demand elastic to its own price? Assessing the consequences of fertilizer subsidy policy in Bangladesh

Owing to little knowledge, this research aims to estimate the elasticity of fertilizer demand utilizing national level secondary data for last 26 years in Bangladesh. At the current phase of country’s agricultural development, it is mostly needed to analyze the extent in which fertilizer subsidies have been effective. The study employed multiple regression analysis and seemingly unrelated regressions (SUR) to estimate the responsiveness of fertilizer usage to its own prices. Results found aggregate fertilizer demand was price inelastic although elasticity of demand for urea and MoP (Muriate of Potash) was inelastic and for TSP (Triple Super Phosphate) was elastic. That means, price changes have very little impact on overall fertilizer usages in the absence of any substitutes for chemical fertilizers. However, output (paddy) price was found to have positive significant impact on fertilizer demand. The estimated coefficient for paddy price indicates that increasing paddy price would significantly increase the demand for fertilizer at a faster rate than the decreasing fertilizer prices. It goes without saying that increasing fertilizer prices would lower fertilizer consumption. However, other variables such as increased paddy area, paddy pricing and irrigation facility development also raise fertilizer need and consumption in the country. Although fertilizer prices have fluctuated over time, the positive effects of these variables have overshadowed the negative effects of pure price on fertilizer demand. On the basis of findings, the study recommended that the current subsidy policy should be designed in such a way that would be more worthwhile.