Manual Applied General Equilibrium

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  1. Strategic Apportionment of the State Corporate Income Tax: An Applied General Equilibrium Analysis
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A fixed proportion of the income of the public household is borrowed negative saving. The other equilibrium conditions are a fixed public budget the revenue and expenditure of the Treasury are equal , zero profits, the budget constraints of the private and public households, a fixed surplus on the trade balance, and equality of saving and investment. The model has a neoclassical closure in the sense that saving determines investment in the model.

Calibration implies that the coefficients in the model are determined such that the model represents the base year situation. For the calibration procedure expenditure and tax tables were used discussed in chapter 3 which show the value of transactions and income flows in the economy. In addition, values of the substitution and transformation elasticities are required. Both the expenditure and tax tables and the value of the elasticities are taken from Zeelenberg et al.

Strategic Apportionment of the State Corporate Income Tax: An Applied General Equilibrium Analysis

The model is a collection of non-linear algebraic equations and is solved directly with a numerical solution technique included in GAMS, a computer package developed to solve for non-linear systems. To analyse specific policy questions for agribusiness the basic model has to be modified. Part IV of the thesis examines the consequences of two specific policies; a supply quota for milk and a supply quota for livestock to protect the environment.

First, detailed policy instruments were incorporated in the model see chapter These are variable import levies and export subsidies for dairy and meat imports and exports from outside the EC, and supply quotas for milk and livestock production. Some background information on the policy issues and the outcome of the policy simulations are presented in chapter 14 a supply quota for milk and chapter 15 a supply quota for livestock.

The results provide some important insights. This stresses the importance of trade for Dutch dairy production and agribusiness. The competitiveness of the Netherlands on the world market for dairy products is affected by the introduction of milk quotas because domestic prices change relatively to rest of the world market prices.

For example, there is a growth of imports from the rest of the world and a relative increase in importance of the EC as the export market for Dutch dairy products.

Applied General Equilibrium |

The assumption in most AGE models of complete or totally incomplete factor mobility needs therefore to be reconsidered. The value of factor demand is larger with high factor mobility implying smaller quota rents and quota prices.

Applied General Equilibrium An Introduction Springer Texts in Business and Economics

It has to be remembered that factor mobility is low in dairy farming. Neglecting the effects in those industries would be misleading. However, the effects are less than predicted by input-output models because of the greater possibilities for input substitution in the AGE model. This is a second best result; quotas reduced the distortions caused by government intervention in dairy markets. The welfare improving effects on industries are larger with price decreases than with supply quotas: output, factor demand, value added and trade change more.

Especially in dairy farming, value added decreases much more in case of the price decreases. These large changes make price decreases in dairy farming politically difficult to achieve.

The strength of the model approach chosen is that it gives a consistent static analysis of the effects of the introduction of milk quotas on inter- industry transactions, price and income formation, factor demand, and exports and imports in Dutch agribusiness and economy as a whole. In this simulation the difference between the effects of using supply quotas and a levy on the demand for compound feed were analysed.


The low price elasticity of demand for compound feed made the differences in the effects on output and inputs between both policies small. However, there is a large difference in value added generated because with supply quotas quota rents are created that support income earned in livestock production. However, in the long run quota rights are just an ordinary production factor. This implies that in the long run livestock farmers are better off with levies on compound feed because value added excluding rents is reduced less with the levy on compound feed.

However, the effects for other industries are relatively small which indicates that the livestock industry is relatively small and isolated in the Dutch economy. Welfare losses measured by changes in the equivalent variation are greater in the case of supply quotas than in the case of the levy. This indicates that supply quotas for livestock cause more distortions than the levy for compound feed. This implies a strong decrease of exports and increase of imports of livestock products.

It is concluded that the model developed is a flexible and powerful too] for analysing the effects of agricultural policy changes on agribusiness and the economy as a whole. This is especially true in comparison with the input-output models that are traditionally used to analyse the economy-wide effects of agricultural policy changes, and with partial equilibrium models. The AGE model developed here provides valuable information for policy makers and interest groups on employment, income and trade in the economy as a whole.

First, the model incorporates accounting consistency for example budget constraints are taken into account as is market balance, in addition to basic macroeconomic identities such as the equality of saving and investment. Second, the model is theoretically consistent which makes the interpretation of the results relatively easy in spite of the fact that the model is rather large. Third, all interindustry effects are explicitly modelled, there is no need to make a choice regarding which linkages are important enough to model as in partial equilibrium models.

Fourth, in a partial equilibrium model some results are quite obvious, for example introducing trade distortions reduces welfare.

In a general equilibrium model this is no longer always the case because the effects on the rest of the economy are also taken into account. Finally, welfare analysis should be applied to the owners of the factor inputs, that is, the households.

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This is easy in the AGE model but not so easy in a partial equilibrium model. Changes in consumer and producer surplus and tax receipts are often a poor proxy for the real welfare changes in an economy.

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The model ignores much detail which is often present in partial equilibrium models. Moreover, the fact that the model is rather large and few data are available means that econometric estimates, and therefore econometric tests, of the behaviourial equations are impossible. However, use has been made of econometric estimates of substitution AESs and transformation elasticities AETs as presented by Zeelenberg et al.

In the future, to make the results of the simulations more useful for policy analysis more technical information could be used e. Although the model is unsuitable for predictions the clear structure and flexibility make it a useful tool for analysing the effects of agricultural policies in relation to different assumptions about key linkages between agricultural industries and the rest of agribusiness and the economy as a whole. Moreover, it can have an influence on traditional agricultural production.

In this paper, we use an applied general equilibrium framework, in which we include two different bio-refinery processes and incorporate so-called cascading mechanisms. The bio-refinery processes use grass, as one of the major inputs, to produce bio-nylon and propane-diol 1,3PDO to substitute currently produced fossil fuel-based nylon and ethane-diol. We examine the impact of specific climate policies on the bioelectricity share in total electricity production, land allocation, and production quantities and prices of selected commodities.

The novel technologies become competitive, with an increased stringency of climate policies.