Government Subsidies for Staple Foods in the Second and Third Economic Development Plans

Food subsidy is a method of income redistribution to the benefit of low income households. In this regard the staple foods play an important role. Due to government budget constraint as well as optimum resource allocation the priorities of selected goods to be subsidized is a very crucial point.The purpose of the present paper is to estimate demand for selected subsidized staple food items (i.e. sugar, cooking oil, bread, meat and milk) using Almost Ideal Demand system (AIDS) model based on the Urban Iranian households budget data during 1984- 2005.Our findings indicate that due to the inelastic features of the subsidized items under consideration any reduction in subsidy causes an increase in price and consequently increase burden on poor consumers. Moreover, comparing government subsidies during the Second and the Third Economic Development plan and the estimated income and price elasticity it can be concluded that performance in the Third Economic Development Plan has been more suitable in terms of food subsidies.