Effects of Declining Energy Subsidies on Value Added in Agricultural Sector

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.