Energy Price Reform and Impacts on Social Welfare
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Abstract
This paper studies the cost structures of different types of diesels, considering both their private and external costs, to determine which are efficient. Partial equilibrium analysis is employed to analyze the impact on social welfare if the price structures are adjusted to be more efficient. The results show that the current price structure is inefficient and distorted. The current refinery prices do not reflect the private costs for all types of diesels. Today, marketing margins are used as a policy tool to incentivize gas stations to distribute and sell more high-speed diesel (HSD) and high-speed diesel B20 (HSDB20). In addition, the current excise tax rate covers other external costs that are not directly related to fuel consumption. As a result, the actual excise tax rate is much higher than the external cost of fuel consumption. For this reason, and due to price subsidies through the oil fund, HSD and HSDB20 diesel prices are below efficient prices. Our welfare analysis reveals that restructuring diesel prices to be more efficient will increase social welfare. This can be achieved by adjusting the marketing margins to be the same rate on the basis of cost of service and modifying the excise tax to reflect the true cost of externalities associated with fuel consumption, along with a road tax reform. Furthermore, our findings demonstrate that price subsidies cannot promote social welfare even if appropriate subsidy rates are set according to the price gap approach. Reducing the role of oil funds is, therefore, necessary.
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