Welfare Effects of Gasoline and Gasoil Price Shocks: A Dynamic Panel Data Approach

This paper uses the Mork approach to decompose the price shocks and analyzes the welfare effects of gasoline and gasoil price shocks for the period of 2007-2014 in Esfahan, Tehran, Khorasan, Fars, Mazandaran, and Khuzestan provinces using a dynamic panel data approach. According to the results gasoline demand is less responsive than gasoil demand to price shocks. For these provinces, the long run price elasticity of gasoline demand in the transportation sector has been found to be more than its short run price elasticity. This is not the case as regards gasoil demand. Price elasticity of gasoline is very small both in the long run and short run although it is more than gasoil price elasticity. Using an Almost Ideal Demand system, it is concluded that welfare effects of gasoil price shocks, as calculated by Equivalent Variation welfare change index (EV), are less than gasoline price shocks.