The Welfare Effects of Rising of Domestic Rice Price on Mazandaranian Households

مجله اقتصاد و توسعه کشاورزی

Article 3, Volume 31, Issue 3 - Serial Number 37, October 2017, Pages 228-239   

Document Type: Research Article

DOI: 10.22067/jead2.v31i3.62855

Authors

S.A. Hosseini Yekani¹; Z. Nematollahi^{* 2}; M. Hosseinzadeh³

¹Sari University of agricultural sciences & natural resources

²Sari University of agricultural sciences & natural resources

³Young Researchers and Elite Club, Zabol Branch, Islamic Azad University, Zabol, Iran

Abstract

Introduction: Measuring changes in economic welfare have been known as one of the practical economic issues. So that, this study aimed to calculate the welfare changes resulting from the change in the price of rice in Mazandaran province and is the first study that done using the food groups’ details and household’s data for estimates demand functionin the country. For this purpose, welfare microeconomic theory and compensating variation (CV) criteria and household income and expenditure data of Mazandaran province in 2014 wereused.
Materials and Methods: Compensating variation represents the net income that the household must be given to restore themto the utility level they were at before the price change. It is negative after a price increasebecause it is expressed as a central authority expenditure to restore the household to thepre-price change utility level. Estimation of compensating variation needtheestimation of households demand system. In this paper, the parameters of the demand system are estimated by applying nonlinear regression to the system of eight share equations. Parameter estimates provided a clearer understanding of household food consumption behavior in 2014, summarized through income and price elasticity. Parameterestimates provide a theoretically consistent model of household food demand that can be usedto evaluate the welfare implications of food price increases.
Results and Discussion: Estimates of income elasticity of demand for urban and rural households are presented in Table 4. The income elasticity revealsthat none of the goods are inferior, while the rice and meat are a luxury for urban households. Other groups such as cereals, dairy, oils and fats, fruits and vegetables, other foods and beverages are also essential commodities for urban households. Rice, meat and fruit and vegetable are the luxury goods for rural households, too. The income elasticity of fruits and vegetables, and other foods are close toone for urban households, demonstrating that welfare analysis of price changes need to account for shifts in demandcaused by the income effect of the changes. The elasticityindicate that the income effectcould be large for these commodity groups. Further evidence about these effects will be provided by the compensatedprice elasticity.Compensated own price elasticity, which measure pure substitution effects, are reportedinTable 5 for urban households and Table 6 for rural households. The elasticity of demand for a beverage is large for all householdsand the elasticity of demand forrice is small for all households. These results indicate that households reduce beverage consumption significantly more than rice consumption in response to price increases. Next, consider a 25, 50 and 198 percent increase in the rice price. This price change causes an increase in household expenditure for both urban and rural households by compensating variation. Increasing in households expenditure for rural households has been greater than urban households. According to the results, urban households have seen 0.38 percent increase in their expenditure by 25 percent increase in rice price. 50 and 198 percent Rice price increasing, increase 1.13 and 19.98 percent of urban expenditure accordingly. Rural expenditure increased 1.31, 3.63 and 52.57 percent by increasing 25, 50 and 198 percent in rice price accordingly. Moreover, the comparison between reductions in household welfare in different income groups has shown that household welfare has declined less when levels of income increased.
Conclusion: This study aimed to calculate the welfare changes resulting from the change in the price of rice in Mazandaran province. For this purpose, welfare microeconomic theory and compensating variation (CV) criteria and household income and expenditure data of Mazandaran province in 2014 wereused. Based on the results, with rising rice prices, household welfare of Mazandaran province has fallen. The welfare of rural households has fallen more than the welfare of urban households. The comparison between reductions in household welfare in different income groups has shown that household welfare has declined less when levels of income increased. Therefore, it is necessary to maintain the household welfare of provinces when the rice price rises and support policies must be adopted.

Keywords

Welfare Changes; Compensating Equivalent; Quadratic Almost Ideal Demand System (QAIDS)

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