Impact of energy carriers' price distortions on energy allocative efficiency: the case study of Iranian provinces

Government control distorts energy prices which leads to loss of optimal factor combination and, as a result, affects efficiency. Previous researches on energy price distortions did not pay attention to the allocative efficiency specifically. In this paper, we empirically estimate the impact of energy carriers' price distortion on allocative efficiency in 28 Iranian provinces during 2002-2015 using Stochastic Frontier Analysis (SFA). Results indicate that energy carriers' price distortions affect allocative efficiency negatively. However, allocative efficiency increased in 2011 due to the energy price reform of 2010; it showed a downward trend in the following years which means that energy price reform was effective only in the short-term. The energy price distortion trend and inefficiency changes are similar in all regions; nonetheless, there are differences in the measures caused by differences in energy consumption, the existence of energy-intensive industries, and technical barriers. Furthermore, among the 28 provinces which are classified to 5 regions, region 2 has the lowest and region 3 has the biggest price distortion during the same period.