Abstract:
Production subsidies, as a part of the strategy of economic growth of the agricultural
sector, are of great importance around the world. Subsidizing production inputs,
particularly energy input, is another way of directing subsidy to the agricultural sector. In
this research, production function of the agricultural sector was estimated using
econometric methods and time series data. After calculating the elasticity of agricultural
sector inputs and, simultaneously, estimating their cost and demand functions of
production inputs using ISUR (Iterated Simingly Unrelated Regression), farmers'
elasticity of price fluctuation of these inputs was determined. The findings of the
production function demonstrated that all inputs, including capital, labor, and energy
were used in the optimal production region. The findings of the cost function
demonstrated that there was negative and low own elasticity price for inputs, in accord
with economic theory. In addition, cross price elasticity of all inputs was positive, i.e. they
were substitutes for each other. The findings of the subsidization policy showed that since
price elasticity of demand for energy inputs was inelastic, reducing the energy subsidy
would reduce energy consumption slightly and, eventually, would decrease value added in
the agricultural sector. Finally, it is suggested that the government implements the energy
subsidy reduction policy based on cost-benefit analysis.
Keywords: Value added, Energy, Production function, Subsidy.
