TITLE:
Price and Income Elasticities of Gasoline Demand in Iran: Using Static, ECM, and Dynamic Models in Short, Intermediate, and Long Run
AUTHORS:
Vahid Mohamad Taghvaee, Parviz Hajiani
KEYWORDS:
Gasoline Demand, Price Elasticity, Income Elasticity, Static Model, ECM, Dynamic Model
JOURNAL NAME:
Modern Economy,
Vol.5 No.9,
August
7,
2014
ABSTRACT: Price
and income elasticities of gasoline demand show whether the price policy,
pursued by the Iranian government, can decrease the high gasoline consumption
sufficiently or not. Since the two oil price shocks in 1970 and 1973, interest
in the study of oil products demand has increased considerably, especially on
gasoline. High gasoline consumption is a serious crisis in Iran, posing
economically, politically, and environmentally threats. In this study, the
elasticities are estimated over three intervals, short run, intermediate run, and
long run in Iran during 1976-2010, by putting the estimates of Error Correction
Model (ECM), static model, and dynamic model in an increasing order,
respectively. The short run, intermediate run, and long run price elasticities
are -0.1538, -0.1618,
and -0.3612
and the corresponding income elasticities are 0.2273 - 0.3581, 0.4636, and
0.7284, respectively. Not only do these elasticities imply that the gasoline
demand is price and income inelastic but also the adjustment velocity,
estimated by ECM, is a low point at -0.1942. Based on the
estimations, the gasoline demand responds to the changes of price and income
slightly and slowly. Therefore, policy makers should develop more strategies to
reduce gasoline consumption, for example, substitute goods, public
transportation systems, and environmental standards settings.