The Effect of Determining Gasoline Price According to Market Mechanism on Environment Pollution (Case Study of Iran)

In Iran, prices of gasoline as the other energy carriers are set by government. This price is lower than gasoline price according to market mechanism and its international level. Lower price of gasoline relative to other consumption goods had increased the growth rate of gasoline consumption and environmental pollution. From the other side, according to the economic theories, change in relative price of the gasoline will directly and indirectly affect the gasoline demand. So, adjustment of gasoline price has an important role on pollution emission. In this paper, precisely effects of gasoline price increase on gasoline demand and environmental emission will be analyzed using a dynamic econometric model. The model is an error correction version of auto regressive distributed lag models. For running of the model an annual time series between 1959-2008 has been used. Based on the estimated models, the short-run and long-run price elasticity of gasoline demand is –0.12 and –0.23 respectively. So, a 1% increase in prices of gasoline, will decrease the gasoline consumption and its environmental pollution about 0.12% and 0.23% in the short and long-run respectively.