European Regional Science Association
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European Regional Science Association
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The abstract for paper number 529:
Johannes Bröcker, University of Kiel, Faculty of Economics, , Germany
Computable General Equilibrium Analysis in Transportation Economics
Computable General Equilibrium Analysis is by now a standard tool in empirical econmics for simulating the effects of variations in exogenous variables and parameters on any kind of economic variable such as output, employment, prices, income and welfare. Exogenous variations (also called shocks) range from policy variables such as tax rates, tariffs, and transfers over regulatory frameworks to technologies and preferences. A more recent field of application is transport economics, the subject of this paper. A typical transport economics application is to study quantitative impacts of transport initiatives like infrastructure investments or pricing policies on economic variables.
The basic idea of CGE analysis (also called Applied General Equilibrium (AGE) Analysis) is to take a textbook model of a general economic equilibrium and to “fill it with numbers”. Its theoretical background is the WALRAS-ARROW-DEBREU theory of general equilibrium with modern modifications and extensions allowing for imperfect markets, a public sector, money, externalities and other complications disregarded in the original theory. The approach is called computable (or computational) because it is made for numerical calculations on the computer, unlike the original theory, that was invented just for understanding how prices and quantities are determined in interdependent markets, not for empirical application. The approach is called equilibrium analysis, because its kernel is the concept of market equilibrium as used in microeconomics. It means that all agents in the economy make mutually consistent plans, such that no agent (no firm, no household, no public institution) has an incentive to revise his or her plan. The approach is called general (in contrast to partial) because all market interactions are taken account of. This means two things: first, there are no “black holes” for payments to vanish in, nor mysterious fountains spitting money which agents receive. Any payment of an agent in the model (for example transport costs) is a receipt of an agent in the model (for example a firm producing logistic services); and any receipt of an agent in the model is a payment of an agent in the model. Second, all agents balance their budget; they expend exactly what they obtain. This does not preclude debt and credit, of curse; but any debt and credit must be explicitly handled in the model, like sales and purchases of goods, services and factors of production.
CGE analysis is particularly useful in transport economies when traditional cost benefit (CB) analysis is insufficient for evaluating the welfare effects of transport initiatives comprehensively. The traditional CB evaluation of a new road, say, measures the benefit by the consumer surplus of users generated by reducing generalised costs, and subtracts building costs in market values and the net increase of technological external costs caused by existing and induced traffic. This procedure is fine as long as the following conditions hold: (1) markets are perfectly competitive and cleared by fully flexible prices; (2) welfare distribution is not an issue, that is each dollar counts equally, irrespective of who gets it; (3) technological externalities outside the transport sector are negligible.
If one of these conditions is not met, one must extend traditional CB analysis by taking repercussions in the rest of the economy, outside the segment of the transport system directly affected, also into consideration. If only condition (3) is violated, one must look at changes in land use, production, consumption, employment et cetera, that may generate technological externalities such as pollution, noise and others. To this end, CGE analysis is one possible analytical tool, but it has competitors such as LUTI models, econometric macro models, system dynamics models and possibly more. Here I will not engage in the debate about the relative merits of CGE and other methods for quantifying indirect effects on a wide range of externality generating variables. But if conditions (1) or (2) are violated, we are in the realm of welfare economics, and I don’t see a viable alternative to computable equilibrium analysis – possibly partial, but preferably general equilibrium analysis. Summarizing this, CGE is the method of choice, if results of conventional CBA have to be corrected due to imperfect markets, or if one is not content with aggregated monetary welfare measures and needs distributional details about welfare implications.
Section 2 is a primer in CGE analysis. Section 3 explains more concretely, how the method can be applied to transportation issues. Section 4 illustrates the applicability of the approach by a practical example, and section 5 concludes.
Unfortunately full paper has not been submitted.