Edible Oil Market Liberalization in Iran: Producer and Consumer Welfare Effects

Abstract

Due to importance of edible oils in nutrition and food security of the community as well as of creating employment and income for its producers, it is always subsidized by several protection policies in Iran. Considering the importance of edible oil as a necessary ingredient in the consumer basket of urban and rural households, reducing or eliminating subsidies for edible oils can have considerable welfare effects. In this study, we used the partial equilibrium model of edible oils market to determine the extent of welfare changes of producers and consumers for the period of 1981-2010. After estimating the supply and demand functions of edible oil, the changes in welfare due to the prices changes by 25, 50, 75 and 100 percent were evaluated.

The results indicated that edible oil is a necessity commodity with regard to income elasticity’s for urban consumers and is a luxury commodity for rural consumers. Furthermore, the price elasticity of demand for urban consumers is less than that for rural consumers implying that the edible oil is less elastic to urban consumer. Moreover, the welfare of producers would increase and consumers would decrease as a consequence of the price increment in edible oil. There was a greater Change in urban consumer welfare relative to change of rural consumer welfare. In addition, the overall decline in urban and rural consumer welfare was higher than that in the welfare of the producers gain.