27 without taking diversion into account, LPG price subsidies for households are regressive and benefit the rich disproportionately (Kojima 2011).

In all cases, diversion makes less subsidized fuel available for the intended beneficiaries, enables black markets to flourish, and all too often forces the poor—especially in rural areas—to pay more. In the extreme, the prices paid can be markedly higher than what would have prevailed in a deregulated market. An example is kerosene in Nigeria, for which the official price has been ₦50 ($0.32) a liter for years but which has been known to cost as much as six-times the official price in some regions (All Africa 2011).

Large enough financial incentives may attract well-organized mafias, who may use physical force and violence to silence investigators and whistle-blowers ( _Hindu_ 2011). To stem diversion, smuggling (into or out of the country, depending on price levels in neighboring countries), and tax evasion, some countries require the use of chemical markers or dyes (Kenya, Senegal, South Africa, Thailand, Togo, Tanzania, Turkey, Uganda), tagging of vehicles (Repúblicana Bolivariana de Venezuela), and even electronic tracking of delivery vans (Tanzania). But when the financial incentives are powerful, those engaged in commercial malpractice find ways to get around these restrictions over time.

A clean-burning fuel for cooking and heating may be a merit good with health benefits not fully recognized by the users. One way of ensuring continuing consumption of such a merit good is to ear-mark cash transfers for the purchase of that specific fuel. In this way, market prices are not affected, and the poor receiving cash can use it only to buy the clean fuel. This is the principle behind bonogas cards for LPG in the Dominican Republic. In this regard, recent developments in biometric databases of personal information merit attention; presumably it would be more difficult to escape detection loaning cards with biometric information than loaning cards without. The government of India is proceeding with what it calls end-to-end computerization of the targeted public distribution system, which distributes subsidized food and kerosene. Some states are now piloting distribution of subsidized food and fuel using smart cards containing biometric information about beneficiary families (India 2013). Egypt is planning to introduce a nation-wide smart card system for rationing subsidized gasoline starting in July 2013, and eventually subsidized diesel except for agriculture and food industries (Reuters 2013). While it is always possible to sell the fuel purchased in this way and obtain cash, the transaction cost of doing so would presumably discourage resale on a large-scale.

# **Unintended consequences of keeping domestic prices low**

Rising claims on the budget or growing tax expenditures, the public being shielded from sharp price rises, and weak price signals reducing incentives for fuel conservation are among the predictable consequences of policy of keeping domestic prices artificially low. Less expected are growing fuel shortages, protection of inefficient fuel suppliers, and rising demand with rising prices once subsidies are reduced or removed.

Fuel shortages are common in a number of markets with low prices. In Egypt, LPG shortages in recent years have been so serious that several consumers have been killed in scuffles over LPG cylinders and the army and the police have provided armed guards for LPG transport. Shortages occur because of commercial malpractice, implicit rationing, and adverse effects of subsidies on the operational and financial performance of oil companies. Subsidized fuels are diverted to black markets or smuggled out of the country, reducing fuel availability in the formal sector. Even when there is no commercial malpractice, as in the United States in the 1970s, price