Dynamics of fuel demand elasticity: Evidence from Iranian subsidy reforms

We exploit three major transport fuel (gasoline and diesel) subsidy reforms in Iran, as quasi-experiments, to investigate the impact of permanent upward price changes on the responsiveness of fuel consumption. We employ monthly regional-level data of fuel consumption in Iran and also explicitly account for outbound cross-border smuggling from Iran to estimate the short, intermediate, and long-term price elasticity of demand. We find that price elasticity and price levels are inversely related to each other. All of our estimations also suggest a substantial impact of subsidy reforms on consumers' behavior such that the magnitude of price elasticities consistently increases after each of the three major reforms. Finally, we find that fuel consumption is more responsive to a change in domestic price in the longer run. Our paper provides quantitative evidence of behavior change after a subsidy reform program, which can be used to better set fiscal and environmental targets.