Bio-based and Applied Economics BAE © 2024 Author(s). Open access article published, except where otherwise noted, by Firenze University Press under CC-BY-4.0 License for content and CC0 1.0 Universal for metadata. Firenze University Press | www.fupress.com/bae Bio-based and Applied Economics 13(4): 387-396, 2024 | e-ISSN 2280-6172 | DOI: 10.36253/bae-15105 Citation: Dehghan, M., Moosavi, S.N., & Zare, E. (2024). Analyzing the impact of government subsidies on house- hold welfare during economic shocks: A case study of Iran. Bio-based and Applied Economics 13(4): 387-396. doi: 10.36253/bae-15105 Received: September 8, 2023 Accepted: September 2, 2024 Published: December 31, 2024 Data Availability Statement: All rel- evant data are within the paper and its Supporting Information files. Competing Interests: The Author(s) declare(s) no conflict of interest. Editor: Fabio Bartolini ORCID MD: 0000-0002-7824-0472 SNM: 0000-0001-5645-1976 EZ: 0000-0002-2787-5507 Analyzing the impact of government subsidies on household welfare during economic shocks: A case study of Iran Mohammad Dehghan1,*, Seyyed Nematollah Moosavi2,*, Ebrahim Zare3 1 Agricultural Economics, Marvdasht Branch, Islamic Azad University, Fars Province, Iran 2 Department of Agricultural Economics, Extension and Education, Marvdasht Branch, Islamic Azad University, Fars Province, Iran 3 Agricultural Economics, Fars Agricultural and Natural Resources Research and Training Center, Fars, Iran *Corresponding authors. E-mail: dehghan191@gmail.com; seyed_1976mo@yahoo.com Abstract. The study evaluates the effectiveness of Iranian government subsidies for households by comparing the welfare impact of food price shocks with the subsidy payments they receive. This helps us assess the government’s efforts to reduce pover- ty in Iran. The household income and expenditure survey in 2020 was used to calcu- late compensated price elasticities using the Quadratic Almost Ideal Demand System (QAIDS). Results showed negative and less than 1 own-price elasticities for all food items, with a sensitivity to changes in income greater than one for demand of cere- als, cooking oil, and fruits. Then, compensated variations (CV) welfare index was used to evaluate the effectiveness of government support payments in reducing household vulnerability due to food price increases. The results showed that the CV fluctuates between 8.05-80.46 $ under different scenarios. In other words, consumers are in a worse situation in terms of welfare and their expenditure increases. The vulnerability index of low-income households, after applying different food price scenarios, is in the range of 1.46-14.67%, which is reduced to 1.35-14.53% by implementing the cash-tar- geted subsidy policy. In other words, the effectiveness of the government’s subsidy poli- cy of $19 per person could reduce the vulnerability of these households by only 0.14%. Keywords: poverty, vulnerability, welfare, subsidies, food, demand system. JEL Codes: D12, D60, I3, I32, Q18. INTRODUCTION Social protection programs like subsidies aim to prevent poverty and social crisis and promote justice, even if it means sacrificing some economic efficiency (Barr, 2020). However, poor subsidy payment methods can cause inefficiency and injustice. There is currently a heated debate among econo- mists and policymakers about the link between targeting subsidies and pov- erty reduction (Amegashie, 2006). Price changes wield considerable influ- ence over resource allocation and consumer behavior, thereby shaping the https://creativecommons.org/licenses/by/4.0/legalcode https://creativecommons.org/publicdomain/zero/1.0/legalcode http://www.fupress.com/bae https://doi.org/10.36253/bae-15105 https://doi.org/10.36253/bae-15105 https://orcid.org/0000-0002-7824-0472 https://orcid.org/0000-0001-5645-1976 https://orcid.org/0000-0002-2787-5507 mailto:dehghan191@gmail.com mailto:seyed_1976mo@yahoo.com 388 Bio-based and Applied Economics 13(4): 387-396, 2024 | e-ISSN 2280-6172 | DOI: 10.36253/bae-15105 Mohammad Dehghan, Seyyed Nematollah Moosavi, Ebrahim Zare implementation of economic welfare policies (Khoda- parast Shirazi et al., 2018). The surge in food prices, both domestically and globally, has become a pressing global concern (FAO, 2021). Although the COVID-19 pandemic exacerbated the issue by disrupting supply chains and inflating prices further (Elleby et al., 2021), the trend of rising food prices predates the pandemic, originating in 2018 (Panzone et al., 2021). In Iran, where food accounts for a substantial portion of household consumption, the anticipated impact of food inflation on household wel- fare is pronounced (Layani et al., 2020). Iran’s persis- tent struggle with high inflation underscores the grav- ity of the situation, with efforts ongoing to identify and address underlying causes (Ilias, 2010). Notably, between 2010 and 2019, Iran witnessed an increase in spend- ing on essential items like food and housing, exacerbat- ing the economic strain on households (Salehi Isfahani, 2020). Despite the reformed social protection policy in Iran, the adverse effects of food price shocks could dis- proportionately affect low-income households in due to their vulnerable economic structures (Pawlak and Kołodziejczak, 2020). To contextualize the analysis of price shocks on household vulnerability and welfare across diverse countries, it is imperative to understand the intricate dynamics of consumer behavior and demand systems. For instance, studies utilizing sophisticated models such as Translog, Almost Ideal Demand System (AIDS), and Quadratic Almost Ideal Demand System (QAIDS) offer valuable insights into the responsiveness of consumers to price changes. Take, for example, Deaton and Mulbaer’s (1980). There has been a growing body of literature regarding the impact of price shocks on household vul- nerability and welfare effects across various countries in recent years (e.g. Aziz et al., 2016; Arfini & Aghabeygi, 2018; Adekunle et al., 2020; Lugo et al., 2022). Karagi- annis et al.’s (2000) analysis on Greece, Abdulai’s (2002) examination of Switzerland, Mazzocchi et al.’s (2004) investigation on Italy, Tefera’s (2010) exploration of Ethi- opia, Ahn et al.’s (2018) study on Korea, Yuzbashkandi and Mehrjo’s (2020) research on Iran and Abdullah and Mohammed (2023) study on Iraq. Specifically, Ivanic and Martin (2008) and Ivanic et al. (2012) researched the correlation between global food price escalation and poverty in low-income countries, considering world and local prices’ impact on poverty. Arfini and Aghabeygi (2018) found that increasing food import prices in Italy affected the welfare index by 1061.48 billion USD in the entire food group. The meat group was most affected and the fruit group was least affected. A recent study (Layani et al. 2020) found that rising food prices in Iran have a significant impact on rural households, with 10.63% of them falling below the poverty line. Anin- dita et al. (2022) used various methods to examine the impact of price and income changes on demand and welfare in urban Indonesia. They found that households substitute some food items as a coping mechanism. Ros- sen et al. (2022) have conducted a study that examines the effect of price shocks on different household groups based on income and age. Their research found that households with lower income and older individuals experience more significant welfare losses and a decrease in tax burdens compared to lower-income households with younger individuals. These studies provide valuable insights into the demand system and price elasticities of goods and offer useful implications for policymakers and practitioners in the field. However, these prior studies have solely focused on analyzing the welfare impacts that arise from changes in prices. However, they fail to address a fundamen- tal question: to what extent can the government’s wel- fare policies, such as cash transfers, effectively mitigate the decrease in welfare and prevent households from falling below the poverty line. Therefore, this current research aims to address this research gap by assessing the impact of the Iranian government’s subsidy policy for poor households. In 2017 year, the Iranian government introduced a new social protection program by replacing univer- sal subsidies with targeted subsidies while implement- ing support policies for vulnerable groups as a way to reduce poverty (Hosseini et al., 2017). A subsidy reform program replaced energy subsidies with direct cash pay- ments. Recently, to protect Iranian households from vul- nerability caused by price liberalization, the government provides additional subsidies to consumers and elimi- nates cash subsidies for high-income groups. Although the amount of cash subsidy increased significantly from 2011 to 2019, the share of this cash payment of house- hold average income decreased from 22% to 5%. This Government assistance includes official transfers from the Ministry of Health, Labour and Welfare and Komite Emdad. Although the poor benefited significantly from the monthly transfers, their real value diminished rap- idly due to high inflation. The reformed social protection programs are targeted, particularly prioritizing poor households headed by women, using a targeting algo- rithm developed jointly with the World Bank. Govern- ment welfare payments decreased from $35.4 in 2018 to $19.8 per person in 2019 due to economic sanctions and reduced revenue, resulting in less support for people in need (Salehi Isfahani, 2020). The study calculates the welfare effects of changes in food prices and evaluates the effects of these changes 389Analyzing the impact of government subsidies on household welfare during economic shocks: A case study of Iran Bio-based and Applied Economics 13(4): 387-396, 2024 | e-ISSN 2280-6172 | DOI: 10.36253/bae-15105 on the poverty line and the number of poor households in Iran. Unlike previous studies, this research considers the vulnerability index, which has received insufficient attention in assessing the effects of price shocks on con- sumer behavior. The paper is divided into distinct sections. Firstly, the theoretical fundamentals and materials, and meth- ods are presented. Secondly, the results of calculating the price and income elasticities of food demand for Irani- an households are reported, along with an examination of the effects of various food price increase scenarios. Finally, the fourth section provides conclusions and sug- gestions. METHODOLOGY Data In this study, to estimate the demand system and calculate the price and income elasticities of food items, the latest cost-income data of 2878 Iranian households supported by the government, which was published by the Iranian Statistics Center, was used. These data include the amount of consumption of each food item and their corresponding price. Also, to estimate the AIDS system, the size of the household, and the edu- cation level of the head of the household were used in the estimation of the demand system. Table 1 presents the socio-economic characteristics of the sample under study. The average age of the head of the household in government-supported households is 52.32 years, while the average number of years of education of the head of the household is 5.27 years. The average size of house- holds in the sample was 3.89 individuals. The govern- ment-supported households included in the study are categorized as low-income households, with an average monthly income of $53.65. It has been observed that the group of households under consideration here has an average per capita food expenditure of $14.05 per month, which constitutes around 26% of the per capita income. Welfare analysis The evaluation of the efficacy of providing subsidies to low-income households is determined by comparing the ratio of the Compensated Variation (CV) index to the per capita income with the ratio of cash subsidies to monthly income (Eq. 1). after cash subsidy CV monthly income monthly income Vulnerability index subsidy policy = - (1) Where CV is the household’s welfare index as a result of different price shocks. the ratio of the Com- pensated Variation (CV) index to the monthly income is known as the vulnerability index (Azzam and Rettab, 2012). e V y Wea lfl ay ri ed ex fb ff er cn tu ss od fl po ri iu ci et sr he oe ce kb m y o l nt e b i l n o s i i p c h y ncom = (2) By following Khodadad Kashi et al. (2005), Arsha- di and Karimi (2013) and Layani et al. (2020), the 66 percent of the average household food expenditure is defined relative poverty line: Poverty Line=66 percent × (average food expenditure) (3) After computing the poverty line, we can divide urban households into two groups: The households that have a food expenditure higher than poverty line (above the poverty line), and the households that have a food expenditure lower than poverty line (below the pov- erty line). The reason for this is because poverty lines are highly elastic to relative food prices (Bresciani and Valdes, 2007), and changes in food prices result in varia- tions of poverty prevalence. Furthermore, we then com- pute a new poverty line, after accounting for the rise in food prices (Rodriguez-Takeuchi and Imai, 2013): Secondary Poverty Line= Poverty Line + Welfare Index-Subsidy policy (4) Different indexes measure welfare changes due to policy implementation. Economic conditions like price changes can affect consumer utility rates. To determine the impact of economic conditions on consumer utility, criteria like Consumers Surplus (CS), Compensated Var- iation (CV), and Equivalent Variation (EV) are used. We use CV to determine the minimum amount that Iranian consumers are willing to accept to tolerate higher food prices. Studies suggest that the CV is the most suitable criterion for our analysis (Tefera, 2012 and Cranfield Table 1. Socio-economic characteristics of the studied households. Variables Average Age of household head (year) 52.32 Education of household head (year) 5.27 Family size 3.89 Per capita Food expenditure ($) 14.05 Per capita income per month ($) 53.65 * Source: Iranian Statistics center in 2020 (1$=208000 Rial). 390 Bio-based and Applied Economics 13(4): 387-396, 2024 | e-ISSN 2280-6172 | DOI: 10.36253/bae-15105 Mohammad Dehghan, Seyyed Nematollah Moosavi, Ebrahim Zare 2007). Compensated Variation was utilized in the study, as indicated by research conducted by Azzam and Ret- tab (2012), Tefera (2012), Layani et al. (2020), and Roos- en et al. (2022). (5) Where pi 0 and xi 0 correspond to price and quantities before price shock and dxi * is the compensated quantity change in demand following the price shock using the compensates elasticities. The percentage change of xi * is not available. However, by the total differential of the Hicksian demand functions xi *(.) for i = 1, 2,…, N i.e., an approximation of the change is obtained. (6) where εij H is the Hicksian price elasticity for i = 1, 2,…, N and j = 1,2,…, N. To estimate the Hicksian price elasticities as shown in (6), we estimate a QAIDS model for N commodities by imposing the usual restrictions: Adding-up, homo- geneity, and symmetry. The QAIDS model developed by Banks et al. (1997), which has budget shares that are quadratic in log total expenditure, is an example of the empirical demand systems that have been developed to allow this expenditure nonlinearity. (7) Where Si is the share of food group i in total expenditure on the N food groups, for i=1,2,..,N; and pj is a vector of prices; M is total expenditure and Z Vector of statistical variables dependent on household charac- teristics. Also, f(p) is the Laspeyres Price Index defined by logf(p)* = Σisilogpi. The restrictions are: ∑n i=1αi = 1.∑n i=1γij = 0.∑n i=1βi = 0 .γij = γji i.j = 1.2…N (8) The formulae for the elasticities in the QUAIDS are given by Banks, Blunbell and Lewbel (1997). They are obtained by first differentiating equation (7) with respect to logM and logpj, respectively, to obtain: (9) (10) The expenditure elasticities are then derived as ei = mi/si + 1. The uncompensated or Marshallian price elasticities are given by em ij = mi/si – dij, where dij is the Kronecker delta, which is equal to one when i=j, other- wise dij = 0. Using the Slutsky equation, em ij = em ij + sjei, the compensated or Hicksian elasticities can be calculated and used to assess the symmetry and negativity condi- tions by examining the matrix with elements , which should be symmetric and negative semi-definite in the usual way. Definition food price shocks There are several methods to define the price increase scenario. The first method is to use previous studies. Another method is to use time series data for food. For this purpose, the price of food taken and the price growth during the studied years were first calcu- lated for each group, and the average rate of change of price growth was calculated and defined as the scenario for food price change. The scenarios of increasing food prices in this study are shown in Table 2. In addition to food price fluctuations, global statistics were also con- sidered according to the Statistics Center of Iran. The first scenario studied is food price changes based on the reports of the Statistics Center of Iran (2021). It can be seen that meat has the highest price fluctuations and vegetables have the lowest price fluctuations. The sec- ond scenario in this study is the price fluctuations of food imports to Iran. On this basis, information on food import prices was collected, and the average annual fluc- tuations in food import prices were used as the basis Table 2. Different food prices shock scenarios (%). Food First scenario Second scenario Third scenario Fourth scenario Cereals 34 15.31 9.64 6.07 Meat 124.4 16.26 4.33 3.83 Dairy 56.7 15.56 3.63 6.88 Oil and fat 54.4 9.60 26.27 8.22 Fruit 27.5 11.96 9.87 5.38 Vegetables 25.4 30.22 8.22 5.35 Sugar 28.5 19.03 13.15 8.08 Tea and coffee 31 10.09 9.87 5.38 391Analyzing the impact of government subsidies on household welfare during economic shocks: A case study of Iran Bio-based and Applied Economics 13(4): 387-396, 2024 | e-ISSN 2280-6172 | DOI: 10.36253/bae-15105 for the price scenario. Finally, the third and fourth sce- narios were defined based on the FAO predicted price changes. Accordingly, the food price index reported by FAO was examined for the period 2003-2021. The annu- al changes in the food price index were calculated, and the average changes in the price index during 2019-2021 were used as the third scenario and the average chang- es in the price index during 2003-2019 were used as the fourth scenario. RESULTS Table 3 displays the average food expenditure and expenditure share of eight main food groups. Cereals have the highest expenditure share, while tea and coffee have the lowest. On average, the expenditure allocated to tea and coffee is $4.50 per month, and the expendi- ture allocated to cereals is $41.70 per month. Meat has the second-highest food expenditure share among all food groups, accounting for 23.52% of the total expendi- ture. According to Layani et al.’s (2020) study on urban households, the average monthly expenditure on food indicates that cereals and meat are the top two priorities, with respective spending of $43.69 and $41.01. Addition- ally, households allocated an average of $4.69 on tea and coffee. A comparative analysis with the current study suggests that these households face challenges in main- taining a healthy nutritional status and are more vul- nerable to price fluctuations. These findings highlight the need to address the nutritional inadequacies of these households and to develop interventions that support better dietary practices. This study focuses on the Iranian agricultural mar- ket and aims to measure the impact of price changes on household expenditures. Specifically, we seek to answer the question: How will a price shock in the agricul- tural market affect the expenses of Iranian households that receive government support? this research explores whether payment of cash subsidies can effectively com- pensate for the reduction of welfare caused by such price shocks. To address the given query, it is imperative to compute the changes in the consumption patterns of various food products that ensue due to fluctuations in their prices. This can be accomplished by calculating the own-price and cross-price elasticities of the differ- ent food categories. The following section presents the results of the price and income elasticities. Price and income elasticities of food After estimating the coefficients of the systems of equations based on the equations presented in the pre- vious section, the price and income elasticities were obtained (Table 4). The compensated own-price and cross-price elasticities of food are shown in Table 4. As can be seen, all compensated elasticities of the studied food are negative as expected, and this is consistent with the behaviour that maximizes the utility of rational con- sumers. In terms of absolute values, the highest own-price elasticity is related to oil, and the lowest own-price elas- ticity is related to dairy. The own-price elasticity of cere- als is -0.398%. Therefore, 1% increase in cereal prices, assuming other conditions are constant, can reduce demand for this commodity by 0.398%. The compensat- ed own- price elasticity of meat is calculated as -0.529%. Actually, the demand for meat and cereals are inelas- tic. It is worth noting that the own-price elasticity of oil and fat is (-0.729%) and the own-price elasticity of dairy products is (-0.006%). In other words, with a 1 % increase in the price of oil and fat (or dairy) assuming other conditions are constant, the demand for this food item decreases by 0.729% (or 0.006%). Own-price elastic- ity of fruits, vegetables and sugar are very close in terms of absolute value as -0.634 %, -0.608 % and -0.633 %, respectively. According cross-price elasticities, there is a poor complementary relationship between cereals and other food groups. However, the effect of changes in cereal prices on demand for other foods is more pronounced. This result may be due to the higher importance of cereal for the poor households or the higher expen- ditures share of cereal. For instance, the effect of ris- ing dairy prices on cereal demand is negative. In other words, with a 1 % increase in dairy prices, the demand for cereals decreases by 0.093 %, and this indicates a complementary relationship between the two prod- Table 3. Average food consumption expenditure and share of food expenditure Food Average monthly food expenditure ($) Food Expenditure Share (%) Cereals 41.699 29.68 Meat 33.045 23.52 Dairy 16.238 11.56 Oil and fat 8.591 6.12 Fruit 12.506 8.90 Vegetables 16.297 11.60 Sugar 7.600 5.41 Tea and coffee 4.504 3.21 * Source: Iranian Statistics center in 2020 (1$=208000 Rial). 392 Bio-based and Applied Economics 13(4): 387-396, 2024 | e-ISSN 2280-6172 | DOI: 10.36253/bae-15105 Mohammad Dehghan, Seyyed Nematollah Moosavi, Ebrahim Zare ucts. However, these households add cereals to their food portfolio as a substitute for dairy products. This result is expressed based on the elasticity coefficient of 0.177%. Although other foods are considered meat sub- stitutes for households, the effect of meat price change on the demand for oil and fat, fruit and tea, and coffee is negative and is equal to -0.106%, -0.026% and -0.429%, respectively, and this indicates the complementarity of meat for these food groups. The cross-elasticity between oil and fat and other food groups such as meat, dairy, fruits, vegetables, and sugar are negative and it shows the existence of a complementary relationship between oil and fat with other food. However, the increase in oil and fat prices leads to an increase of 0.048 %, 0.065 %, 0.021 %, 0.068% and 0.043 % demand for meat, dairy, fruits, vegetable, and sugar, respectively. The cross-elas- ticity of other commodities with oil and fat suggests a substitution relationship between them. The highest sub- stitute for fruit is tea and coffee (cross price elasticity is 0.560). Also, the highest complementary relationship between fruit and dairy products was obtained (cross price elasticity is -0.385). For households supported by the Relief Committee, compensated cross-sectional elasticity of vegetables indicates the existence of a sub- stitution relationship between vegetables and other food groups (except tea and coffee). Indeed, if the decision is made to include foods such as cereals, dairy products, meat, oil and fat in the consumption basket containing vegetables, these foods are added to the poor households’ consumption basket as a substitute. The highest and lowest substitution relationships are for vegetables-meat (0.199%) and vegetables-sugar (0.067%), respectively. It is worth to mention that vegetables themselves are con- sidered as a complementary commodity for oil and fat (elasticity - 0.048 %), fruits (elasticity - 0.054 %). In oth- er words, increasing the price of vegetables reduces the demand for oil, fat and fruits. Interestingly, vegetables are considered as a complementary commodity for oil and fat (cross-price elasticity is -0.048 %), fruits (cross- price elasticity is -0.054 %). In other words, increasing the price of vegetables reduces the demand for oil, fat and fruits. The estimated total income elasticities presented in Table 4 have the expected positive signs in all eight commodities. The values for cereals (e=1.303), oil cook- ing (e=1.210), and fruits (e=1.392) are much greater than others. This implies a fairly large response of demand for these food groups to changes in total food expendi- ture. Actually, the demand for cereals, oil cooking, and fruits are elastic with respect to total food expenditure. The estimated income elasticities of meats, dairy, veg- etables, sugar and tea and coffee are less than unity, so these goods are fairly inelastic with respect to total food expenditure. Welfare effects of food price shocks Evaluating the impact of price shocks on consumer welfare can provide valuable insights into the effective- ness of government support policies aimed at reduc- ing poverty and vulnerability. Table 5 shows the effect of food prices shock on household expenditures. As shown, Under the first price scenario, CV welfare index fluctuates between 0.98-29.15%. The highest CV index is related to meat and the lowest welfare index is related to tea and coffee. The total Compensated variations index in this scenario is 57.28%. In other words, as a result of changes in food prices, the food expenditure of house- holds supported by the government will increase by $80.461. Therefore, if the government-supported house- holds want to choose and consume the same food basket before the price change, their expenditure will increase by 57%. Under the second price scenario, the total wel- Table 4. Price and income elasticities for each food groups. Cereals Meats Dairy Oil cooking Fruits Vegetables Sugar Tea and coffee Cereals -0.398 0.086 -0.093 0.073 0.065 0.016 0.005 0.321 Meats 0.196 -0.529 0.175 0.048 0.084 0.119 0.061 -0.071 Dairy 0.177 0.715 -0.006 0.065 0.203 0.523 0.367 -1.044 Oil cooking 0.285 -0.106 -0.382 -0.729 -0.001 -0.048 -0.082 0.565 Fruits 0.258 -0.026 -0.385 0.021 -0.633 -0.054 -0.060 0.560 Vegetables 0.144 0.199 0.188 0.068 0.069 -0.608 0.068 -0.035 Sugar 0.159 0.236 0.284 0.043 0.088 0.175 -0.633 -0.219 Tea and coffee 0.206 -0.147 -0.429 0.011 -0.071 -0.117 -0.093 -0.243 Income Elasticities 1.303 0.918 0.136 1.210 1.392 0.998 0.774 0.836 * Source: Authors’ calculations. 393Analyzing the impact of government subsidies on household welfare during economic shocks: A case study of Iran Bio-based and Applied Economics 13(4): 387-396, 2024 | e-ISSN 2280-6172 | DOI: 10.36253/bae-15105 fare index of Compensated variations was $23.523, which is 16.74% of the baseline food expenditure of households. The CV index of food items in this scenar- io fluctuates between 0.32-4.60%. With the simultane- ous change of food prices based on the third and fourth scenarios, CV welfare index was equal to $12.327 and $8,058 respectively, which is 8.78% and 5.74% of house- hold food expenses in the base year, respectively. The highest CV index in the third scenario is related to cere- als (2.90%) and the lowest is related to tea and coffee (0.32%). In the fourth scenario, the welfare index of food items fluctuates in the range of 0.17-1.82%. The vulnerability index of poor households f luc- tuates between 1.46-14.67% in different price scenari- os. The highest vulnerability index was obtained after applying the first price scenario and the lowest was obtained as a result of the fourth price scenario. Given that the average monthly income of poor households is 548.31$, the total welfare loss due to rising food prices is equivalent to 14.67% of average household income in first scenario, which is an indicator of the vulnerability of households as a result of multiple food price shock. This index decreases to 1.46% in the fourth scenario. In order to support low-income households and establish social justice, the Iranian government pays a cash sub- sidy of about $19 per person per month to the head of the household’s account. The amount of cash subsidy received by the households is equivalent to 0.14% of the average monthly income of the households. In other words, the Iranian government has only been able to reduce the vulnerability of low-income households by 0.14% by implementing this policy. Therefore, after the implementation of the targeted subsidy policy and sup- porting the low-income groups, the vulnerability index of households will be in the range of 1.35-14.53% in dif- ferent price scenarios. Finally, table 6 presents the secondary poverty line after the price increase and the subsidy policy. As can be seen, the secondary food poverty line varies between $26.88-99.29 under the different price shock scenarios. The results show that the subsidy policy was not efficient and some low-income households are still at risk of food poverty. The highest number of households below the poverty line will occur in the first price scenario. Table 5. Welfare effect of multiple meat price shocks. Food Groups Expenditure Scenario 1 Scenario 2 Scenario 3 Scenario 4 CV ($) CV (%) CV ($) CV (%) CV ($) CV (%) CV ($) CV (%) Cereals 41.699 14.502 10.32 6.457 4.60 4.079 2.90 2.563 1.82 Meats 33.045 40.947 29.15 5.417 3.86 1.436 1.02 1.279 0.91 Dairy 16.238 9.172 6.53 2.526 1.80 0.568 0.40 1.111 0.79 Oil cooking 8.591 4.642 3.30 0.824 0.59 2.239 1.59 0.702 0.50 Fruits 12.506 3.453 2.46 1.497 1.07 1.229 0.88 0.672 0.48 Vegetables 16.297 4.194 2.99 4.910 3.50 1.334 0.95 0.878 0.63 Sugar 7.600 2.169 1.54 1.441 1.03 0.991 0.71 0.611 0.44 Tea and coffee 4.504 1.381 0.98 0.450 0.32 0.451 0.32 0.242 0.17 Total 140.478 80.461 57.28 23.523 16.74 12.327 8.78 8.058 5.74 Vulnerability index before subsidy policy 14.67% 4.28% 2.29% 1.46% Vulnerability index after subsidy policy 14.53% 4.14% 2.15% 1.35% * Source: Authors’ calculations (1$=208000 Rial). Table 6. Effect of price shock on poverty line. Scenario 1 Scenario 2 Scenario 3 Scenario 3 Secondary food poverty line 99.29 42.35 31.15 26.88 % of households above poverty line 37.18 49.57 58 61 % of households below the poverty line 62.82 50.43 42 39 * Source: Authors’ calculations. 394 Bio-based and Applied Economics 13(4): 387-396, 2024 | e-ISSN 2280-6172 | DOI: 10.36253/bae-15105 Mohammad Dehghan, Seyyed Nematollah Moosavi, Ebrahim Zare DISCUSSION Economic welfare measurement is crucial for pol- icy-making. Demand analysis and consumption pat- terns help predict future situations. It’s crucial to assess the impact of economic policies like subsidies and price changes on food security, health, and consumer welfare. We can gauge their effectiveness by observing consumer behaviour. In this study, an attempt was made to inves- tigate the effectiveness of the policy of paying subsidies to poor households on reducing the vulnerability of poor households. For this purpose, use the household expend- iture and Income survey of households supported by the government (under the support of the Komite Emdad) and the QUAIDS model and CV welfare index. The CV showed that the lost welfare of the low-income house- holds in Iran under different price shock scenario. The welfare index of compensated variations of low-income households fluctuates between 8.05-80.46 $ under dif- ferent scenarios. In other words, consumers are in a worse situation in terms of welfare and their expenditure increases. This finding was also reported by Arfini and Aghabeygi (2018) for Italian consumers and Layani et al. (2020) for Iranian urban households. The largest decline in household welfare due to price changes is related to two groups of cereals and meat. The CV index for the cereal fluctuates between 10.32-1.82% under different price scenarios. For meat, CV is between 0.91-29.15%. Roosen et al. (2022) showed that a general rise in the value-added meat tax from 7% to 19% leads to a welfare loss of 0.83 euros per household per month in Germany. Based on the results, the degree of welfare lost by the studied households in 2020 as a result of differ- ent price shock scenarios, considered on average about 14.67%, 4.28%, 2.29% and 1.46% of their income in this year. Comparison of the findings with those of other studies (e.g. Layani et al., 2020) confirms that the vul- nerability of low-income households is more than others. The results indicated that a significant number of house- holds have lower food expenditures than the estimated food poverty line, and they suffer from malnutrition. Therefore, the government’s support policies (including the payment of cash subsidies to the head of the house- hold) have not been able to eliminate the vulnerability of low-income households caused by food price inflation, and some of these households are still below the pov- erty line. The government has tried to play an effective role by supporting vulnerable households with appropri- ate assistance programs or paying subsidies to offset the impact of price increases. The results of this study show that cash subsidy payments offset only a small portion of the welfare loss. Thus, if the government’s goal is to sup- port vulnerable households, regulating the market for these products can play an important role in food secu- rity and support implementation. Iran’s goods and services subsidy policy has been criticized for being inefficient despite being a consum- er-supportive policy for the past 40 years. The poverty index is still high and standard welfare is not achieved for households. It is costly, potentially distorts the mar- ket, and benefits some groups that do not require sup- port. Currently, the Iranian government provides a uniform subsidy to all individuals irrespective of their distinctive characteristics. However, empirical evidence demonstrates that the vulnerability of different indi- viduals varies based on their demand structure. There- fore, undertaking such studies can aid the government in providing targeted subsidies based on the income of each person and minimizing the adverse effects of price shocks. For instance, individuals with lower income exhibit different behavioral patterns than those with higher income. Thus, the subsidy granted to them should be calculated based on their demand and welfare effects. This study is a significant step towards targeted subsidies, reducing governmental resource wastage, and promoting efficient allocation of resources. The current study was conducted on low-income households that are supported by the government, commonly known as relief committee member households. The findings of this study suggest that the government’s existing sup- port packages require a redesign to enhance the living conditions of these households. To achieve the desired outcome of improving the livelihoods of these house- holds, policymakers are advised to consider increasing the amount of cash subsidy provided to these individu- als. Alternatively, policymakers may also consider imple- menting sound policies that create stable employment opportunities for these individuals, which may lead to an improvement in their income status. On the other hand, the demand for various types of meat, cereals, dairy products, and other food products will increase for various reasons, including population growth, which can be met by domestic production or foreign sources. Considering the significant results and effects that changes in global prices can have on house- hold expenditure, the most logical policy is to support domestic production. More specifically, if food produc- tion does not keep pace with population growth, per capita food production will decrease as a result. There- fore, increasing demand should be met by increas- ing food imports or reducing exports, or resorting to both measures, which may affect domestic food prices. The increase in food imports definitely leads to greater dependence on foreign sources. This leads not only to 395Analyzing the impact of government subsidies on household welfare during economic shocks: A case study of Iran Bio-based and Applied Economics 13(4): 387-396, 2024 | e-ISSN 2280-6172 | DOI: 10.36253/bae-15105 a financial burden, but also to a number of economic, social, and political problems, including the impact of global price fluctuations on the domestic market. Con- sidering the increasing trend of global food prices in recent years, and taking into account the welfare losses due to this price increase as an indirect tax imposed on consumers, it is possible to accurately identify vul- nerable households and pay support. The cost played a more effective role in offsetting the impact of the price increase and supporting them. Given the impact of the rise in food prices on the well-being of the population and the need to respond to the increase in demand for food resulting from the rise in prices and to pay atten- tion to food security, it may be important to improve the quality of people’s diets through measures such as increasing the production of appropriate foods and cre- ating diversity in food production, especially for foods that account for a significant portion of household food expenditures. CONCLUSION This study set out price elasticities of eight food groups to evaluate the impact of food price changes on Iranian households. Using the Quadratic Almost Ideal Demand System (QAIDS), we investigated how increas- ing food prices affects the welfare of Iranian urban con- sumers and the poverty line. The estimated price and expenditure elasticities align with expectations, with own elasticities being negative and expenditure elastici- ties being positive. The research has also shown that the rise in food prices has led to a decline in the purchasing power of households, resulting in a loss of welfare. The findings of a cost-of-living analysis indicate that the con- sumer welfare of different scenarios varied between $8.05 to $80.46. This is equivalent to approximately 5.74% to 57.28% of the total food expenditure of eight food groups in 2020. While the impact of food price changes varied across food groups, the majority of households expe- rienced significant difficulties in accessing food due to such price changes. It is noteworthy that after food price shocks, there was an increase in the number of house- holds that fell below the poverty threshold. Therefore, the government can play a crucial role in supporting the vulnerable households and households below the poverty line, considering the increasing trend of food prices in recent years with appropriate support programs or by paying subsidies to compensate for the effect of the price increase. However, the findings of the present study indicate that the extant cash subsidy pay- ment policy is insufficient to compensate for the decline in welfare resulting from the surge in food prices in recent years. The outcome of such research endeavors can significantly contribute to the policymakers’ ability to develop comprehensive and targeted support packages for households susceptible to economic vulnerabilities. By incorporating the results of these studies into their policy formulation process, policymakers can design effective measures to address the needs of vulnerable households and facilitate their economic stability and overall well-being. However, there are some limitations in the pre- sent study that should be considered to make appro- priate policy. This limitation is using the main food groups instead of using food separately in this study. Further research can also focus on calculating welfare effect separately for each food item and for different income deciles in order to determine exactly the extent of government support for vulnerable and poor house- holds. The application of price elasticities, segmented by income, age, and education, can provide an accu- rate framework to determine consumer behavior. Such a framework can facilitate the formulation of effective policy designs, which can be further explored through future research. It is important to note that the simu- lations conducted in this study were based on cross- sectional data. 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