Evaluating the Effect of Increasing in Level of Prices on Urban Welfare: Compensatory Variation Approach and Preference Function

Document Type : Original Article


1 Department of Economics, Faculty of Management and Economics, University of Sistan and Bluchestan

2 MA in Economics, Faculty of Management and Economics, University of Sistan and Bluchestan


The Iranian government spends billions of Rials for basic goods each year to maintain or Increase consumer's welfare level. Meanwhile the rise of inflation reduces their welfare levels. If the government attempts to compensate these negative effects a measure for assessing the severity of consumers' effectiveness is necessery. The purpose of this paper is to measure the negative welfare effects resulting from rise of inflation rate on the consumers' welfare through extracting and calculating compensating variation (CV) based on the AIDS expenditure function. The findings given the CV criterion reflects that in order to compensate the welfare effects (over the 1975-2013 period) the government should have paid on average 13 percentage of total expenditure annually to every urban household with size 4.5 person. Measuring the CV correlation coefficient with the annual inflation rate of different commodity groups indicate that the commodity groups of housing, Food and Health Care have the highest negative welfare effect with 96, 61 and 67 percent on the urban consumers respectively.


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