An Investigation on The Process of Modification of
Subsidy Policy
Reza Kazemi , Masood Tavazoei , Nikrooz Nasr and Ali Naghi Mashayekhi
Abstract—In recent years, increase in energy price in inter-
national markets has turned paying energy subsidy into a
serious challenge, because those countries paying subsidies are in
constant pressure (Gupta 2003). Rise in energy price and demand
has encountered those countries with earnest problems in energy
pricing (Davis 2001). Besides, subsidy elimination and imparting
the resulted money to the society, without planning for solving
its short-term and long-term consequent problems, will lead to
public dissatisfaction as well as industrial performance downturn
and also it will cause inflation. In this paper while offering a
comprehensive model for this problem and dynamic analysis of
the policies implemented so far and also investigation of those
policies in short-term and long-term frames, another policy is
suggested for solving this problem which not only guarantees
industrial development and increase in public welfare level, in the
form of powerful social service systems, convenient transportation
system or free high quality education, but also will gradually
remove energy subsidy from government budget and thus will
help the government to get rid of this intolerable burden.
Keywords. Subsidy, Free
Riding,Income, Inflation.
Energy — Consumption,
I. INTRODUCTION
Having a retrospect on researches about Energy subsidies
manifests a great focus on the effects of eliminating the
subsidies on low-income division. Manson et al. elaborated
the interaction between the low-income division and different
operating parts of the society such as welfare system, banking
and medical sectors as well as insurance systems. Analysing
the effects of eliminating subsidy on the performance of firms,
Transportation system and government Manson concluded that
elimination of subsidy without spending the resulted deposit
will lead to increase in poverty in society. David Coady et al
centered on the effects of elimination of fuel subsidy on real
income and the cost of households and they also estimated
the short-term and long-term effect of price growth and the
distribution of these effects among different income divisions
using a relatively simple math model. They hold the view
that degrading in income of low-income householder is more
noticeable than the decrease in hogh-income householders. At
the end he suggest an effective welfare system and spending
the deposit caused by elimination of subsidies in education
and medication system as two effective policy to alleviate the
effect of price growth on low-income division. Kagni Kpodar
also discusses the distribution of the effect of price growth on
different social division and he believes that the diagram of
effect of price growth in terms of cost per person has a U
Department of Management and Economy , Sharif University of Technol-
ogy, Tehran, Iran, E-mail: rezakazemi@sharif.ir,masood.tavazoei @ yahoo.com
shape. This effect relates to escalation in householders cost in
short term while in long-term or mid-term demand regulate
in a way that minimize the effect, Kagni thinks that price
growth put the pressure on low-income division that can be
lessened using a powerful welfare system. He also believes that
spending cost on education and medical section will make the
best advantage for the poor. Jonathan Halpern and Douglas F.
Barnes studied the role of subsidy and its effect .they pointed
out that because the subsidies are on the consumption cost
rather than on primary cost of energy utilization they are not
appropriate for the poor, since they cannot afford the primary
cost and as a result they can take advantage of subsidies on
consumption. Gupa et al. hold that most of the oil exporter
countries, offer the oil product in a lower price comparing
with the world price and this type of subsidy is inefficient and
unfair, because the opportunity cost of offering oil products
in such a low price is very high,besides these subsidies do
not target the poor division. They also mention the financial
effects of subsidies that put a huge burden on the government
; leading an increase in doverment’s debt. Gupta believes
that this mechanism deteriorate the effect of fluctuation in oil
price on the economical conditions. He admitted that subsidy
elimination is pretty complex and controversial issue which
lies in the resistance of subsidy users. In his point of view the
most pressure will be on the low-income division, since then,
he believes that the government support is required to protect
them. According ti what was mentioned earlier the main focus
on the previous researches was on low-income division whose
resistance is considered the main barrier in the way of subsidy
elimination and as a result, previous researchers sought for a
policy to degrade the pressure on this division. While there
are other critics who believe that the high-income division,
rather than low-income division, who takes the most advantage
of the subsidies are the main obstacles in implementing
the elimination of subsidies. For example David Pearce and
Donate Fink suppose that solely eliminating the subsidy will
not success because the rent-seeking nature of subsidies that
oppose the subsidy or rent eradication. They deduce a political
and economical is necessary before subsidy elimination. The
more unfair the subsidy is distributed, the greater will be
the resistance, because the capability of withstanding among
the high-income is much more than the low-income. In this
article we intend to investigate the causes of failure in subsidy
elimination in countries using a system dynamic approach. We
are also trying to find out the most crucial barriers mentioned
earlier to suggest an effective and practical policy at the end.
II. STATEMENT OF THE PROBLEM
In OECD studying, any action taken in order to set the price
lower than market price for the consumer and higher for
producers is considered as subsidy. In other words subsidy
lessen the cost for the consumers and producers. IEA also
suppose Energy subsidy as an action taken by the government
That aims Energy section and reduces production cost of
energy or raises the price paid to producers or declines the
price paid by consumers. Steven Lippman suppose economical
rent as the difference between current income resulted of one
of the production factor and the income resulted of utilizing
that production factor in the next best choice. Pasour believes
that any action taken in order to getting welfare and retaining
it without returning any welfare to the society is rent-seeking.
common cause holds the view that considering the definition
of rent and subsidy, it is logical to take subsidy as a type of
rent, because usually the product or service price is equal to
their import price, whereas the energy price is much less, by
this, one who uses energy, utilize the welfare subsidy without
providing any welfare for the society. David Pearce holds
that the difficulty of subsidy elimination lies in the fact that
there are some people who takes advantage of the subsidies
and therefore if the subsidy was eliminated, there would be
certainly crucial losers who has a noticeable capability to
stop the reforms. As a result he believes that considering the
subsidy elimination as a win-win process is totally misleading.
In the definition given earlier, only the monetary aspect of the
rent was focused, while it is also possible to redefine rent
in terms of utilization, consequently all of the people in the
society are using energy rent. Because the utilization by gas
heating or electrical light is more than the utilization in their
next best usage, all of the people in the society much or less
are using energy rent and as a result there will be resistance
against subsidy elimination. In other words the consequences
of subsidy elimination will be public goods such as justice,
development, etc while according to Mansur Olson theory the
probability of a group consensus to use the public good is low
that is called as the Free-Rider Problem. To state the matter
differently in this condition everyone will say:’why should I
pay the price of this public good. Others can pay and I can use
it. Olson believes the more decision maker, the less probable
is to come to a consensus. He also emphasizes that if people
are forced to pay for the cost of the reform and they are from
the low-income division the Free-Rider Problem is more likely
to happen ,hence the probability of failure in group consensus
increases.
A. The Concern
According to economical and population growth energy de-
mand of the country has risen up. Accordingly the Energy
consumption in the country has increased.Because the energy
price is too low in the country the government will pay a
huge subsidy for energy.This will intensify the financial burden
on the government. But the government while tolerating the
unfavorable immense economical pressure cannot eliminate
the subsidies and is settled to a gradual non regular increase
(see Figure. 1).
Electricity
Fig. 1: Energy Price
Fig. 2: Public Budget Shortage
Il. DYNAMIC HYPOTHESIS
It is possible to divide the people into 2 parts. those who use
subsidy altogether will be called rent seekers(the minority)
and those who use energy subsidy(no more than household
usage) will be called the majority. As it was mentioned earlier
the since the majority are using energy rent they are also
reluctant to subsidy elimination and the politician will act
in accordance with the majority desires. But assuming the
energy consumption growth, the amount of subsidy paid by the
government will also rise and a financial burden is imposed
on the government (see Figure. 2).
So, the politicians are forced to raise the price although the
society is not content with the reform. However, the majority
will not seriously oppose the reform because there is cost in
protesting and according to Olson theory since the population
is large, the income is low and their benefit is insignificant and
symmetrical the probability of free rider problem among them
will increase, consequently they will not succeed to express
opposition in groups.(see Figure. 3)
While the rent seeker find their rent gone, withstand against
the policy. Pearce believes this opposition will be in the form
of lobbying with politician, though, in Iran this reluctance
might be observed in different form. In Iran because of the
governmental economy most of governmental firms comprise
the rent seekers. In other words the main part of the rent
seekers is in the government and on that account, has a great
influence on decision makers. The group in question tends to
regain or increase their rent by putting pressure to increase
& Gasoline
Gasoine
© Gas
2
Gas Oi
lester
cP
Fig. 4: Increase in energy price and the price of consumptive products
the price of its service and products whether justifiable or
unjustifiable(see Figure. 4 ).
In this case, another view lies in the fact that budget shortage
leads to inflation and price growth is not compatible with the
trends illustrated in Figure. 5, however it has strong theoretical
ba:
Politicians under the pressure of rent seekers and in order
to satisfy the majority, settle to an inconspicuous energy
price increase. It is worthy to add that according to Olson’s
theory the less the decision maker and the more asymmetrical
their decision benefits, the more probable it is to come to
a group unanimous consensus. As a result making a group
decision among the rent seekers is more likely comparing
to the majority group. Thus, the prices will be fixed for a
while or rise slightly until the energy consumption grows more
and the financial burden on the government become greater
and so on. As Pearce believes, as the time interval in which
the government pays subsidy increases, the rent seeking for
the subsidy grows faster and the investment on this type of
activities escalates that leads to fostering the rent seekers. In
other words if the government pays the subsidy for a longer
st Fecal Dts (of Geral Buon)
0 1S Consumer Pc cen (576-0)
Fig. 5: Budget shortage and inflation
time, it would be more difficult to step back.
Politicians under the pressure of rent seekers and in order
to satisfy the majority, settle to an inconspicuous energy
price increase. It is worthy to add that according to Olson’s
theory the less the decision maker and the more asymmetrical
their decision benefits, the more probable it is to come to
a group unanimous consensus. As a result making a group
decision among the rent seekers is more likely comparing
to the majority group. Thus, the prices will be fixed for a
while or rise slightly until the energy consumption grows more
and the financial burden on the government become greater
and so on. As Pearce believes, as the time interval in which
the government pays subsidy increases, the rent seeking for
the subsidy grows faster and the investment on this type of
activities escalates that leads to fostering the rent seekers. In
other words if the government pays the subsidy for a longer
time, it would be more difficult to step back.
IV. POLICIES IMPLEMENTED SO FAR
Raising the energy price: As it was elaborated earlier,
increasing the price without considering the benefit of
dominant group and politician, resulted in failure to fully
implement the policy.
Offering incentives to low-income division: In this
policy, because of overlooking the dominant group (the
industry) the government in its best case could eliminate
the subsidy paid to people that may decline the demand
and consequently put a great pressure on the industry
sector that will compel the government to reduce the
household energy price.
Rationing: This policy usually is taken in household
sector, because rationing the industrial energy leads to
decreasing the production that is not plausible neither for
the government nor for the industry.
Investment on hygiene, education and transportation:
Since this policy will have long-term improvement and
people will observe the effects after a long time, politi-
cians do not take it seriously and therefore it is not
executed properly.
V. MODEL STRUCTURE
A. General Model
As it is depicted in the Figure. 6, main model comprises 3
sectors, including: Government, Consumption, Production that
are interdependent via some variables shown in the figure. In
the following we will discuss the structure of each sector in
detail:
B. Sectorl : Production
In this structure (see Figure. 7) a parameter named “interest”
is defined regarding price and piece cost that indicates the
investors desire in investment and is computed by (Price \
PriceCost) ratio. The geater the ratio, the more interest
investors have for investment. Following that, using interest,
Normal Production and a look up fuction called ”f int”
the variable "Desire Production” is defined that determines
Goods and Their Prices
ae
Consumption
Mond Supply
Pressure on\Govermmayt
Demand
Energy
Government
Production
Pressure og/Government
Fig. 6: Sector Map
the desired capital. Afterwards, regarding the discrepancy
between Desired capital and Capital (Real Value)and also
time needed for capital absorption, monthly investment is
determined. In addition, energy productivity is calculated in
terms of product price, level of production, energy price and
energy consumption. Providing a high energy productivity
manufacturers tend to use more energy in their production.
or in other words, the energy intensity of new investments
will rise, since it is economical and relatively cheap to use
more energy in production line. Subsequently, Energy intensity
will raise product prime cost as well as factories’ energy
consumption (Ene Increase) The product price is determined
by Supply-demand mechanism through the variable ”Ratio”
defined as demand/supply. Giving the ratio as above 1 the
price will rise and if it is below, the price will dwindle. The
cost of Goods sold (Price Cost), mentioned earlier, will be
determined by other cost(including prime cost) and also the
cost of energy consumed which is illustrated in the stock-flow
model.
1) Validation: As it is shown in the Figure. 8 production
follows the changes in demand and since production is greater
than demand, so there will be price plunge until an equilibrium
is reached and as it mentioned earlier because of efficiency
decline caused by price drop, the industry tends to produce
new products utilizing lower energy intensity. This scenario
is reflected in the model via the variable "Energy intensity of
new investment”
Fig. 8: Validation ;Price(blue),Production(red), Demand(green),Energy
Intensity of new Investment
C. Sector2 : Government
This sector (see Figure. 9)has the function of price regulat-
ing. People and governmental organization will pressure the
government corresponding to special parameters. Meanwhile
the government budget and the amount of subsidy paid by
government are two other sources of pressure. The resultant
pressure will decide the energy price for people and industry.
There are two crucial parameters involved in people pressure
on the government which are Good utilization (which indicates
in what extent people utilize products comparing to normal
condition) and the level of public welfare that is determined
by the government’s residual budget. On the other hand, the
pressure exerted by industry to government is settled by two
pivotal parameters which are the Capacity utilization of the
factories (utilization of capacity) and total profit earned in
f Des En Int
T Des Ene. Int.
Energy Intensity of
new Investment
i
Energy
Requirement for|
Ene Increase | the Capital | Ene. Dep
Energy Intensity
of Capital
Dep Time
oO: go) Capital Real 0
Value) Dep P
Investment afio mice
ze _» Production ine dem sup
Time of Utilization of min interest | other cost
Constructing Capacity
Ene Cons. of \ price cost Ind Energy
Price>
futil cap Normal
Production
Desire interest
Desire
Capital
normal util )
sce
Production
a
Profit welfare
Profit
/ Nommal Profit
Fig. 7: Production Model
product sales (profit welfare). The amount of subsidy is also
another source of pressure on the government which impedes
the government from spending the budget on other plans rather
than subsidy resulting in public dissatisfaction and government
popularity shrinkage and eventually government discharge that
is not desirable at all, hence paying subsidy is considered as
a serious pressure for the government.
1) Validation: As it is illustrated in Figure. 10, budget growth
will raise government’s capability to pay subsidy, consequently
the energy price will dwindle both for industrial and household
usage.
Inspecting the Figure. 11 implicitly shows that as Goods
utilization declines, the energy price for both group has risen
up. This behavior can be explained as follow: reducing Goods
utilization while keeping the number of products and industrial
energy consumption unchanged, the fraction of the budget
spent on energy subsidy will be allocated to less energy as
a result of the demand decline. Thus, the energy price will
diminish. As it can be seen the decline in People energy price
is more conspicuous and this is because as Goods utilization
decrease the people pressure increases more comparing to
industrial pressure.
D. Sector3 : Consumption
In this sector people consumption paradigm has been modeled,
besides, their budget allocation to the main expenses including:
buy products, Energy purchase and the cost of optimization,
is discussed.
Price
Time! pee le
f People Pre ~ \ Pl® Time \ Pre
People
f People Energy
find energy fInd Pre
price a
Utiliz:
Ind Pressure
Intl i Pressure
Price al People Percieve VG fInd Gov Intl Price>
7X Pressure isu
numt aa , ind
eae: in B Jt Pric A Price
(reer Price| Change Change Lie m ind paoc Percent Ind Price
Percent People, pe r
Price
People J
Ener;
Prieto P Ind Subsidy
Fiscal Pressure
Energy Cons 0: People
People
Goods Util
f Fiscal Pre
Fig. 9: Government Model
In this model (see Figure. 12)there are three key variables:
Max energy cost, Des Cap Needed per month and Des
Cost Retrofit. All of these variables have Money/Month unit.
The amount of money paid for each aforesaid expense is
determined by linear distribution of the monthly income (the
variable “income”) among these three expenses. For example:
REALER=
min(Income x maxEnergyCost \ Total DesCost
,maxEnergyCost)
In the case (see Figure. 13) that a part of the income is
left unused, that will result in increase in Income level. It
means the quality of living will improve which may leads to
an increase in the number of required product for example.
In the model above for each bought product, the amount
of monthly energy consumption is calculated and augments
the corresponding stock (Actual Energy requirement for the
capital). Meanwhile it is assumed that all of the products
consume a certain amount of energy monthly (New ED), so
it is also possible to compute the aforementioned variable
(Original Energy Requirement for the capital) by multiplying
the capital by New EI. But the reason to keep actual Energy as
a stock lies in the ability to reflect retrofit policy in the model.
Hence, it is assumed that each product can be retrofitted at
most as the Potential Retrofit factor determines and the desired
optimization in energy consumption is decided regarding to
Goods utilization (It is crystal-clear that if goods utilization
is high, the interest in optimizing energy consumption will
Cost
Total Des
F Real .
( max Service
Ratio
2 noe =
Retrofit Co Can Ene CoCanbe
be Paid aT Paid
R share Eshare ¢ wt
Income Level
bh
Fig. 12: Consumption Model-1
Fig. 10: Validation! ;Budget(blue),Industrial-Energy- Fig. 11: —_-Validation2;Goods-Utilization(blue),Industrial-Energy-
Price(red),People-Energy-Price(green)
decline) and it will determine the cost paid monthly for
optimization. Goods utilization as mentioned before is defined
in what extent the goods are being utilized comparing to
Price(red) ,People-Energy-Price(green)
normal condition. Providing goods utilization = 1, the amount
of monthly consumed energy by each product will be the
same as New EI in general, the amount of monthly consumed
Capital Cost Can
be Paid
@.
Cost
Pri
Increae n AER
for the Capital]
Normel Util
™
yw Normal Energy
Er D id
Desired Goods gai aa
Ul na Energy NEneDe\ ©
Cost Cost
Util Energy z fDes El
‘Goods Util"
(Bee Cost
~]
Potential Retrofit” » tential EI
Actual Energy
Requirement
“~~ DesireRet Actual Re
Original EL
bt cost per
Factor \ retrofit
rere —ey) Original Dereseir Oo
OER Energy OER
Requirement
forthe
Capital
Fig. 13: Consumption Model-2
energy for each product is equal to Goods utilization * New
EI. Goods utilization is equal to the ratio of monthly energy
cost to energy cost in normal utilization and in the model it is
formulated as the quotient of affordable energy cost (Ene Cost
can be Paid) divided by Energy cost in normal condition(N Ene
De Cost). Furthermore, the maximum desired energy used in
cost allocation in previous part, is equal to the cost that should
be paid monthly giving Goods utilization = 3. But as it was
mentioned earlier, income level can change this number. In
other words as the level of welfare increases, people’s desired
Goods utilization will also rise. For example people may prefer
to keep lights on for 9 hours a day as they become better
off while normally they would turn them on for 3 hours, in
this case goods utilization is four times greater than normal
condition (good utilization = 3)
In this part people’s purchase pattern is modeled (see Fig-
ure. 14).The number of required products is determined in
terms of income level and in the next step the cost of required
capital is calculated (Cap Needed Cost). And regarding af-
fordable cost and the product price, product demand is formed
and eventually shipment is determined in terms of demand and
supply.
1) Validation: As Figure. 15 illustrates, as income grows,
the amount of good utilization also rises. It is worthy to
mention that at the initial moments as Income increases,
Goods utilization will also grow proportionally, whereas in the
following, because income growth leads to purchasing more
and newer products that needs energy, Goods utilization will
decline, however the equilibrium is reached in higher level
comparing to outset.
Fig. 15: Validation-1;Income(blue),Goods-Utilization(red)
According to Figure. 16, price drop will gradually release an
amount of money leading to strengthening the purchase po-
tential. Consequently Goods utilization is increased, however,
since a fraction of the money is spent on buying new products
it does not increase correspondingly.
E. Analyzing the Model
Having connected the three aforesaid sectors and calibrated
the model, following result is observed.
It could be easily educed from the Figure. 17, that budget
growth result in decline in both industrial and household
energy price. At the outset the decrement is somehow intense
while as time goes on energy consumption increases leading
to a slight price growth and gradually reaching to equilibrium.
According to Figure. 18 and as it was discussed earlier,
increase in budget will result in energy consumption elevation
that hinders initial price plunge.
<Income Level>
Normal Capital Needed
per Person
F welfare
Des cata ao Ya Population
Needed
¥ Capital
Capital Needed i Ration Desire
per Person Buying
<Capital Cost Cap _
Can be Paid> a ot
wanes Se 7 Lifetirne
Demand
wie
Welfare .
io ee ——— — | Capital
\ Cap ‘tal Depreciation on Capital
ulation> Shipment»
—-
<Production>
Fig. 14: Consumption Model-3
——
Fig. 16: Validation-2;Price(blue),Goods-Utilization(red)
epee
000 68076084 920 1000 1080 1160 1240 1520 1400
‘Tume (oath)
Fig. 17: Dependency Of People-Energy-Price(green) and Industrial-
Energy-Price(red) to Budget(blue)
600 680 760 $40 920 1000 1080 1160 1240 1320 1400
‘Time Otout)
Fig. 18: Dependency Of Energy-Cons-of-industry(red) and Energy-
Cons-of-People(green) to Budget(blue)
600 680 760 $40 920 1000 1080 1160 1240 1320 1400
Time Qfonth)
Fig. 19: Dependency Of Price(red) and Production(green) to Bud-
get(blue)
Fig. 20: Dependency Of People-Energy-Price(red) and Industrial-
Energy-Price(green) to Budget(blue)
“3
“
40,000
0 60 780 $7 $60 1050 1140 1250 1920 1410 1500
Time Ofeem)
Fig. 21: Dependency of Fiscal-Pressure(red) to Budget(blue) & Intl-
Price(green) if we use fixing price policy
In Figure. 19, at the outset because of budget increase and
energy price downturn the primary product price is reduced,
thus investors will be more interested in investing (the vari-
able interest increases)and consequently the production also
increases, however , since energy comprise a small fraction of
people income, changes in energy price will not provide people
with noticeable amount of money. As a result, there will be
slight change in demand and so the price and production will
return to their initial value.
In addition , budget vaccination, the prices will also fluctuate
which is in accordance with previous research findings (Fig-
ure. 20). Another interesting insight that is investigated in the
model is that if the government decides to stabilize the price
while energy price is steadily increasing what will happen.
As you can see in Figure. 21 the burden on the government
will turn out to become intolerable after a while, which means
that there will not be any budget left to fulfill other government
demand.
Based on Figure. 22 This policy will also stabilize the product
price and production rate, leading to elevation in job security
that will not last long as discussed earlier.
In this case (Figure. 23) the pressure on the government is
dramatically less than previous conditions, leaving a large
fraction of the budget to increase the public welfare level.
As it is shown in Figure. 24, discarding the production decline
in the first years, it is returned to its initial rate while the
price plunges and will not come back to its initial value.
It also shows that even after a dramatic increase in energy
price a stable equilibrium will be reached and the government
pressure is endurable. Another interesting insight resulted by
this model is inspecting direct subsidy policy which means the
government decides to pay the subsidy directly to the people.
600-90 «780 «70 «960 «1050 1180 1230
1320 1410 1300
Fig. 22: Dependency of Price(red) And Production(green) to Bud-
get(blue) if we use fixing price policy
03
20,000
4
720 $40 960 1080 1200 1320 1440 1560 1680 1900
Time Ofeam)
Fig. 23: Dependency of Fiscal-Pressure(green) to Budget(blue) &
Intl-Price(red) if we don’t use fixing price policy
In Figure. 25 and Figure. 26 the behavior in the equilibrium
is depicted:
As it can be observed in figures above, in the case of direct
payment the investment interest will not change noticeably.
The prices will grow and production will roughly remain
unchanged. it should be added that in this policy it is assumed
that industrial energy subsidy is still being paid). Unquestion-
ably the behavior depends on how the policy is implemented,
while this policy cannot be investigated more in this model(
I’m not sure I understand your last sentences).
VI. ACKNOWLEDGMENT
This research was supported by National Elite Foundation of
LR.Iran. We thank them and appreciate their support.
600 720 $40 960 1080 1200 1320 1440 1560 1680 1800
Teme QMloat)
Fig. 24: Dependency of Price(red) And Production(green) to Bud-
get(blue) if we don’t use fixing price policy
900 950 1000 1050 1100 1159 1200
Time Qfoame)
7250 1300 1350 1400
Fig. 25: Equilibrium Value of Price(blue) , Production(red) & Inter-
ested(green) In not paying subsidy to people condition
10,000
0,000
10
9,900
70,000
760 800 840 880 820 960
Tume(Monta)
600 6 680720 1000
Fig. 26: Equilibrium Value of Price (blue) , Production (red) &
Interested (green) In directly paying subsidy to people condition
VII. CONCLUSION AND SUGGESTED POLICY
Regarding the model structure and also simulation results, it is
clear that the government prefers not to pay subsidy as less as
possible, in order to spent the limited budget on construction
project and improving public welfare by providing better
social services, free education, welfare facilities and enhanced
transportation system. On the other hand public satisfaction
and industrial development mainly depends on energy price
and subsidy elimination will result in various problems in
short-term as discussed earlier. Our suggested policy to pass
this period prosperously, is that the total amount of industrial
subsidy which is quite conspicuous should not be paid directly,
instead it must be spent on adopting new technologies and
providing suitable conditions for technological development in
industries. In other words greater subsidy should be paid for
adoption of modern and low energy consumptive technologies.
this subsidy is paid for the products or equipment rather than
energy. This policy has the following advantages:
« Industries will develop more than before resulting in
becoming more self dependent. They will be able to
enter international markets to progress dramatically and
gradually become independent of the subsidies.
« Taking advantage of state of the art technologies will
lead to producing low consumptive goods, as a result the
household energy consumption as well as the amount of
household subsidy will decline. Besides, implementing
such policies will foster small businesses growth which
is essential for industrial development.
« Implementing the suggested policy will hinder investors
of lobbying with politicians which affects government de-
4,000
71,000
600,000
3,000
76.500
400,000
2,000
76,000
200,000
800 880 960 1040 1120 1200 1220 1350 144) 1520 leue
‘Tine Month)
Fig. 27: result of Policy;Price (blue) , Production (red) & Energy
Consumption of People
cisions and their satisfaction will be provided by purchas-
ing enhanced and modern equipments using governmental
subsidy. To state the matter differently the rent seeking
firms will turn into innovative ones playing a crucial role
in country development.
It may be helpful to mention that, the answer to the ques-
tion’why this policy was not effectively implemented” lies
in administrative and legal deficiencies that inhibit the ex-
ecution of an integrated policy which stems from lack of
short-term and long-term simulation showing the requirements
and appropriate mechanisms. Another obstacle in the way of
implementing the policy is its noticeable executional risk. It is
obvious that the consequences of the failure in implementing
the policy will be severe for the government and serious public
dissatisfaction will be expected that may lead to government
discharge. The other barrier is the huge amount of money
required in the first step of fulfilling the policy to compensate
the primary dis: ‘action pressure on the government. More
often when government has such a great amount of budget,
it will spend it on construction project and also on finishing
the incomplete projects and will not risk the money in such
long-term policy. Altogether the reasoned mentioned and sim-
ilar reasons will prevent the policy from being implemented
effectively. We are hopeful utilizing the scientific documents
offered in this paper will provide better condition to fulfill
this policy. In following, suggested policy is simulated for
more inspection and its long-term behavior will be analyzed
to identify the probable defects.
Implementing the aforesaid policy will lead to decrease in
product energy consumption(See Figure. 27). Since the de-
mand is roughly kept invariant, the production level and
the price will approximately remain unchanged, whereas the
energy consumption decreases which is totally the desirable
future we are looking for.
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Reza Kazemi was born in am, Iran, on August 27,
1986. He received B.S. degree in electrical engineer-
ing from Sharif University of Technology, Tehran,
Iran in 2008 (with honor, third rank). He is currently
z working toward M.S. degree in Sharif University of
Technology (SUT), Tehran, Iran, Since summer of
2007, he has been working with Dr.Mashayekhi and
passing a lot of courses about Management such
as System Dynamics I & I,Learning Organization
and Project Management.also have a experience of
Teacher Assistant in both System Dynamics 1 &
wh project such as How a Technology
Growth and the other like that.
Masood Tavazoei was born in Tehran, Iran, on
June 27, 1986. He received B.S. degree in electrical
engineering from Sharif University of Technology,
Tehran, Iran in 2008 . He is currently working
toward MBA in Sharif University of Technology
(SUT), Tehran, Iran. Since summer of 2007, he has
been working with DrMashayekhi .
Mohammad Mashayekhi 1970 B.Sc.. in Mechan-
ical Engineering, Sharif University of Technology,
Tehran, Iran, 1978 Ph.D. in Management, Sloan
School of Management, MIT, Cambridge, Mas-
sachusetts, USA.Founder of Graduate School of
Management and Economics,President, Rahbaran
Petrochemical Co, I. R. Iran, Fields: System Think-
ing, Systems Dynamics, Business Policy and Strate-
gic Management, Learning Organization,
