The long-run macroeconomic impacts of fuel subsidies
Michael Plante ()
Journal of Development Economics, 2014, vol. 107, issue C, 129-143
Many developing and emerging market countries have subsidies on fuel products. Using a small open economy model with a non-traded sector, I show how these subsidies impact the steady state levels of macroeconomic aggregates such as consumption, labor supply, and aggregate welfare. These subsidies can lead to crowding out of non-oil consumption, inefficient inter-sectoral allocations of labor, and other distortions in macroeconomic variables. Across steady states, aggregate welfare is reduced by these subsidies. This result holds for a country with no oil production and for a net exporter of oil. The distortions in relative prices introduced by the subsidy create most of the welfare losses. How the subsidy is financed is of secondary importance. Aggregate welfare is significantly higher if the subsidies are replaced by lump-sum transfers of equal value.
Keywords: Oil; Fuel-price subsidies; Developing countries; Fiscal policy (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: The long–run macroeconomic impacts of fuel subsidies (2013)
Working Paper: The Long-Run Macroeconomic Impacts of Fuel Subsidies (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:107:y:2014:i:c:p:129-143
Access Statistics for this article
Journal of Development Economics is currently edited by M. R. Rosenzweig
More articles in Journal of Development Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().