EconPapers    
Economics at your fingertips  
 

Simulation of price controls for different grade of gasoline: The case of Indonesia

Muhammad Akimaya and Carol Dahl

Energy Economics, 2017, vol. 68, issue C, 373-382

Abstract: A gasoline subsidy is one of the most prevalent strategies for distributing welfare to the people in oil-producing countries. However well-intentioned, the policy will distort the gasoline market with the resulting inefficiencies. Furthermore, the gasoline subsidy takes a great amount of government's budget. Arguably, these funds could be spent elsewhere with a greater impact on economic growth. These governments are aware of the cost of such a policy, yet face difficulties in removing the policy because of strong resistance from the public. This paper looks at the unique case of Indonesia that only provides a subsidy for regular gasoline and in turn proposes an alternative policy that introduces a subsidy for premium gasoline at a lower rate to reduce the overall gasoline subsidy cost. There has yet to be any research that simulates price controls for gasoline with different grades. The aggregate demand for gasoline in Indonesia is replicated using a translog cost calibration approach. Simulations based on the calibrated demand are then performed and the results confirm the existence of potential savings that are largely determined by the cross-price elasticities between regular and premium gasoline. The benchmark scenario, based on a recent study of substitutability between gasoline by grades, results in an 11.5% reduction in subsidy cost of around 950 million USD with a subsidy rate of Rp 2254/liter. Furthermore, the optimal rate of subsidy for premium gasoline results in a reduction of inefficiency as consumers' welfare increase by 6.8 trillion rupiahs (or 560 million USD).

Keywords: Gasoline subsidy; Policy reform; Gasoline by grades; Translog calibration; Price control simulation; Policy inefficiency (search for similar items in EconPapers)
JEL-codes: Q31 Q38 Q41 Q48 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0140988317303535
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:68:y:2017:i:c:p:373-382

DOI: 10.1016/j.eneco.2017.10.012

Access Statistics for this article

Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Haili He ().

 
Page updated 2020-07-08
Handle: RePEc:eee:eneeco:v:68:y:2017:i:c:p:373-382