Distortions resulting from consumption subsidies or rationing systems
often lead welfare analysts to use market price opinions, where
household budget survey respondents are asked to provide their opinions
of equivalent market prices of subsidized or rationed goods, to value
consumption of the rationed goods. This is because prices paid by
households for rationed goods do not represent the true marginal utility
from consumption of these goods. This is the case in household budget
surveys undertaken in Iraq, for example, where rationed food items
received through the Public Distribution System are valued at market
prices using price opinion data rather than at official prices facing
Despite the fact that most Living Standards Measurement Surveys conducted in countries that maintain consumption subsidies collect market price opinions, little evidence exists to support the notion that respondent opinions on market prices adequately approximate shadow prices of subsidized or rationed commodities.
This paper explores the adequacy of market price opinions of subsidized food commodities using data from Iraq. The evidence presented here suggests that price opinions of subsidized food commodities are influenced by the importance of the subsidy in the household economy - a reflection of household welfare levels and preferences. This leads to the conclusion that price opinion data for subsidized goods distorts the estimated transfer value of the PDS food subsidy and biases welfare analysis, particularly affecting the ability to monitor trends over time.
JEL Classification: I32, D63, D45, D41, H23
Keywords: Subsidies, rationing, prices, welfare, poverty analysis