Price opinion data in subsidized economies: Empirical evidence from Iraq

Tareq Abu-El-Haj, Franziska Gassmann & Cathal O'Donoghue

#2018-033

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 households.

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