Dellink: Modelling the Costs of Environmental Policy

Dellink, Rob B. 2005. Modelling the Costs of Environmental Policy: A Dynamic Applied General Equilibrium Assessment. Edward Elgar Publishing.

Different kinds of economic models:

Partial equilibrium models: “…describe those markets in an economy that are relevant for the analysis at hand” (13).

General equilibrium models: “…are similar to partial equilibrium models, with the main difference that general equilibrium models describe the entire economy” (13). See Ginsburg and Keyzer 1997.

Input-output models: “…can be regarded as simplified general equilibrium models, since they assume that substitution possibilities are absent” (13).

Neo-classical growth models: “…share their micro-economic foundation with general equilibrium models, but look at the development of the economy over time. Dynamic general equilibrium models are effectively neo-classical growth models” (14).

Endogenous growth models: “…emerged from neo-classical growth models, as many authors were dissatisfied with the fact that exogenously –given technological change is the driving force of economic growth in the neo-classical growth models. Therefore, models were developed that describe technological change endogenously” (14).

Neo-Keynesian models: “…are not based entirely on micro-economic theory, but rather on extrapolation of historic trends” (14).

There are three conditions that must be met for AGE models: zero profit, household income condition (that expenses can never be above income) and the market clearing condition.

UPDATE:

Different specifications of models:

Theoretical v. applied
Static v. dynamic
For dynamic: myopic for forward looking
Determistic v. stochastic
Calibrated v. estimated
Geographical scale
How integrated within sub-models
Tech progress: endogenous or exogenous (15-6)

Three basic conditions for AGEs:

Zero profit condition: “…under constant returns to scale the value of output has to equal the value of all inputs…firms that have a constant returns to scale production function and that operate under full competition will never be able to reap any excess profits. Note that this does not imply that there is no return to capital: capital is one of the inputs to production and receives a payment like all other inputs” (17).

Income condition: “Households cannot increase their expenditures above their income…Total income may stem from payments for the supply of labour and capital to the firms and from tax revenues” (17).

Market clearing condition: “For each good, the market clearing conditionhas to be satisfied, that is, total demand equals total supply. For the primary production factors, labour and capital, this means that total demand for these goods must be equal to the total amount available” (17).

“Applied general equilibrium models are generalized input-output models, where substitution is allowed and prices are determined within the model. They can be seen as a system of non-linear equations, which can be solved simultaneously. The essence of AGEs is that prices of all goods are determined within the model such that all the conditions stated above are satisfied simultaneously. The economy can be described in the AGE model as a set of balances: for every demand there is a supply” (18).