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Simulation of price controls for different grade of gasoline: The case of Indonesia
Colorado School of Mines.
Luleå University of Technology, Department of Business Administration, Technology and Social Sciences, Social Sciences. Mineral and Energy Economics Program and Payne Institute of Earth Resources, Division of Economics and Business, Colorado School of Mines, Golden, CO .
2017 (English)In: Energy Economics, ISSN 0140-9883, E-ISSN 1873-6181, Vol. 68, 373-382 p.Article in journal (Refereed) Published
Abstract [en]

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).

Place, publisher, year, edition, pages
Elsevier, 2017. Vol. 68, 373-382 p.
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:ltu:diva-66470DOI: 10.1016/j.eneco.2017.10.012ISI: 000418208100030OAI: oai:DiVA.org:ltu-66470DiVA: diva2:1155485
Note

Validerad;2017;Nivå 2;2017-11-08 (andbra)

Available from: 2017-11-08 Created: 2017-11-08 Last updated: 2018-01-11Bibliographically approved

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CiteExportLink to record
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Citation style
  • apa
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