Policy Goals of Setting Prices of Energy Carriers in Iran's Economy

Price ratio of energy carriers on factor costs of production in Iran's economy shows a trend, which is not consistent with those of industrial economies and even some energy exporting economies. The mismatch, initiated from heavy subsidizing energy carriers by the government, has caused substitution of energy carriers in place of other inputs, i.e. labour and capital. Although the policy maker has announced boosting economic growth, raising employment and keeping cost of living low, as the goals of the ceiling price policy, the investigations carried out in this paper illustrate that the policy has not met its publicly announced goals. To identify the policy goals of subsidizing energy carriers we conjecture, along the line of political business cycles theory, that the policy maker has subsidized energy carriers to attract votes of voters. Comparing the trend of energy subsidies with the timing of election periods reveals that political cycles can partially explain the trend of energy subsidy in Iran's economy.