“estimate of electricity subsidies and impact of electricity subsidies reform in Pakistan: a micro model study”

Abstract

The paper employs micro model in order to address the electricity subsidy reforms and its welfare impacts. The study uses two pricing policies one with uniform price increase and other with non-uniform price increase. These policies are compared with equivalent subsidy reduction. The policies are assessed on the basis of reduction in consumer surplus i.e. consumer welfare and reduction in deadweight loss (inefficiencies) of the society, which arose due to the over consumption of subsidized electricity. Moreover Pakistan Social & Living Measurement survey (PSLM) 2011 – 2012 is used in order to calculate the welfare estimates of the households. The empirical findings shows that inefficiencies reduce when prices are increased uniformly among the households above 30%, whereas non-uniform increase in price among the households is much more efficient as it makes consumer less worse off and recovers deadweight loss more rapidly. Equivalent subsidy reduction with non-uniform pricing is best pricing policy to be employed in order to reduce deadweight loss and consumer agony. Whereas in case of Pakistan while increasing the price of electricity subsidies should be targeted. Moreover result shows that about 82% of the subsidy is enjoyed by the middle and affluent group, while this group is also responsible for the 92% of the deadweight losses.