The Impact of Electricity Price Liberalization on the Iranian Industrial Output: A Panel System Approach

Document Type : Original Article


1 Department of Economics,Faculty of Economics and Political Science, Shahid Beheshti University

2 M.A. in Economics


A substantial rise in the price of electricity,  which took place within the subsidy reform program of the year 2011 in Iran, led to a heavy increase in production costs. This rise of production costs is expected to induce a considerable impact on the industrial output. The main goal of this study is to estimate the effects of increased electricity prices on the production costs and output of 23 industrial subsectors in the Iranian Economy. To this end, a multifactor translog cost function, with three factors of production, namely electricity, labor and capital, are adopted and estimated within a panel system framework. The impacts of any price liberalization on electricity demand depends on the price elasticity. However, income elasticity of demand is of crucial importance, especially for developing countries like Iran. Empirical results  show  that labor, electricity and capital demand  are  not price sensitive and their price elasticity’s are calculated as -0.16, −0.32 and -0.52. While the results indicate the existence of substitution possibilities between electricity and labor, electricity–capital inputs are complementary. This means that changes in electricity prices have an impact on labor demand and investment demand. Moreover, a 1% increase of electricity price leads to a -0.009% decrease of output and a 1% increase of electricity price causes the average cost of production to increase. This covers a range for 0.03% in recycling to 0.06% in basic metals sector.


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