Disaggregated Welfare Effects of Agricultural Price Policies in Urban Indonesia

The Government of Indonesia, like many governments in developing countries, has intervened in food markets to control and stabilize food prices. And recently, the government has had to reduce input and food subsidies due to an increasing fiscal deficit. The resulting food price increases have had effects on consumers that differ among income groups. This paper develops a theoretically consistent methodology to measure changes in different income groups' welfare caused by the adoption of alternative food pricing policies. Households were classified based on expenditure behavior. We obtained estimates of demand parameters for each income class using Indonesian household level expenditure survey data, and evaluated welfare changes based on the estimated parameters. The different income groups consumed different types of foods and had different demand responses to prices and income. The results show the importance of considering distributional effects of policy changes and of developing appropriate targeting of food policies.