The Iranian presidential elections are over. Judiciary Chief Ebrahim Raisi will be the eighth president of the Islamic Republic, having received 17.9 million votes in an election with the lowest turnout in the Islamic Republic’s forty-two-year history. During the three presidential debates, the main issue was the dwindling Iranian economy: High unemployment rates, especially among youth; rapid depreciation of the rial; lack of investment; systematic corruption; high rates of poverty and inequality; cash subsidies; smuggling and the black-market; and US sanctions were hotly debated by the candidates.
While punitive sanctions and the subsequent collapse of oil exports are often seen as the main culprits behind the country’s most recent economic crises, systemic corruption and mismanagement over the past decades have played a much more important and persistent role in bringing Iran’s economy to the brink of collapse. At the same time, lawmakers and government officials in Iran repeatedly revert to the same set of failed populistic economic policies, failing to make short-term sacrifices that benefit the country in the long term. One such policy is price controls, a favorite in the toolkit of Iranian policymakers, who have attempted to control persistently high inflation rates over the past decades, but obviously with no success.
One of the most basic lessons taught in Economics 101 is that price is the signaling mechanism in a market. Meddling with market prices—even in one market—can cause serious distortions in the whole economy by altering relative prices of goods and services and by pushing supply and demand out of equilibrium. Specifically, price ceilings will create shortages in the economy, leading to long queues and waiting lists and, after some time, will generate sufficient demand and incentive for parallel black markets, corruption, and smuggling to surface.
Price controls in the Iranian energy market and the subsequent massive energy subsidies are an important case study of government interference in markets. According to a 2019 International Monetary Fund report, energy subsidies in Iran—explicit and hidden—are estimated to be upwards of $111 billion or 25 percent of the country’s GDP, benefitting top income groups more than poorer households. For example, the price of electricity in Iran is less than one-third of a cent (or $0.003) per kWH, which is about forty-five times less than the average world price of around 14 cents per kWh. Besides leading to huge waste in electricity consumption in Iran—especially by households in higher income deciles—and inadequate private investments in this industry, these super low electricity tariffs have made mining of cryptocurrencies extremely profitable in the country and a potential means to evade US sanctions.
As a result, in recent years, Iran has experienced a “crypto-rush”, whereby government, private, and foreign entities, such as Chinese companies, have entered crypto-mining at an increasing rate in the country. This, in addition to more frequent cold and heat waves, one of the worst droughts in decades, inadequate investment in the electricity industry of the country, and wasteful electricity usage, has led to increasing power outages in the past few years, and the situation is only worsening. These…