The Effect of Raising Electricity Price on Welfare of the Household Sector in Rural Areas of Guilan Province, Iran

Abstract

Present study investigates the effect of soaring residential electricity price on the welfare of rural individuals in Guilan Province by Almost Ideal Demand System (AIDS) in which the elasticity’s and welfare variations were calculated by Compensation Variations (CV) and Equivalent Variations (EV) for the time period of 1991-2012. It was shown that the absolute value of income and price elasticity of electricity was less than one unit. Low price elasticity of the demand shows the slight impact of price variations on the demand for electricity in the studied period, on the one hand, and the lack of an appropriate substitute for electricity in residential sector, on the other hand. The calculation of welfare variations and its comparison with the share of electricity in the paid subsidy shows that with 50% and 100% increase in residential electricity price, the cash paid to the households is less that the amount acquired. Accordingly, it can be argued that the direct effect of residential electricity price modification (increase) has not been compensated. In fact, the welfare loss of the households, due to more expensive electricity, is more than the acquired welfare. Yet, in a gradual increase scenario, the calculated CV is less than the payments to the families, and hence it is the only price policy that does not impose a loss on families and improves their welfare.