Inefficient subsidy in Nigerian oil sector; implications for revenue generation and household welfare in Nigeria

Subsidy exists when consumers are assisted by the government to pay less than the prevailing market price of a given commodity. In respect of fuel subsidy, it means that consumers would pay below the market price per litre of petroleum product. This paper is aim at analysing the effects of the increase in energy prices on the social welfare of Nigerian households and comparing the consequences with the condition in which in concurrence with increase in energy prices, the government undertakes transfer payments to Nigerian households in order to protect their social welfare status. An analytical reasoning model was adopted and within the framework of this model the effects of increase in energy price on social welfare is discussed. Decrease in energy subsidies and a shift towards market prices will result in a lower budget deficit for the government and powerfully harness one of the main causes of inflation. However, if the elimination of subsidies be accompanied by transfer payments to households, the result is increase in the government budget deficit which in its turn will enhance inflation thus very negatively affecting social welfare.