Computable General Equilibrium (CGE) Modelling and

Cost-Benefit Analysis (CBA)

presented by

Peter B. Dixon

Centre of Policy Studies, Victoria University

to the

Cost Benefit Analysis Forum

Sydney

July 17, 2015

CBA and CGE

CBA is concerned with particular projects, e.g. staging an event such as the Olympic games; imposing an environmental regulation, such as a ban on clear felling in a native forest ; improving public infrastructure, e.g. highways

CBA outputs include: effects on economic variables such as revenues (e.g. ticket sales, TV rights) and costs (e.g. stadium construction); and effects on non-economic variables such as health, air quality, and leisure time.

CBA outputs are focused on variables close to the particular project

CBA and CGE

CGE is concerned with the whole economy. Traditional applications are in the analysis of

broad economic policies, e.g. taxes, tariffs, trade, immigration

CGE outputs include effects on economic variables such as real consumption, welfare,

GDP, exports and imports, aggregate employment, average wage rates, and output by

industries

CGE outputs include variables that seem far from the policy under consideration

Connection between CBA and CGE

Project, e.g. Improved highways

CBA

Effects on project related variables, e.g. trucking costs

CGE

Effects on economy-wide variables, e.g. GDP

Topics

1. Introduction to CGE modeling: the USAGE model of the U.S. and the input-output database

2. CBA/CGE assessment of the effects of highway expenditure in the U.S.

3. Concluding remarks

1. Introduction to CGE modeling: the USAGE

model and I-O database

USAGE applied by and on behalf of U.S. International Trade Commission, U.S. Treasury, U.S. Departments of Commerce, Agriculture, Homeland Security and Energy, the Cato Institute and the Canadian Government

in analyses of trade policies, the Obama stimulus package, the national export initiative, illegal immigration, terrorism threats, epidemics, biofuels and other greenhouse policies, environmental regulations, oil prices, U.S. jobs from trade with Canada and North American integration

Also used in traditional CBA arease.g. analyses for:

Mitre Corporation on airport infrastructure (NextGen)Dept. of Transportation on costs/benefits of road infrastructure

USAGE input-output database

(contains 11m value flows) Prod-

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Exports Govt

Size I I 1 1 1

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2. CBA/CGE assessment of the effects of

increased highway expenditure in the U.S.

Inputs and outputs of a CBA model and

translation into shocks for a CGE model

CBA model:

Highway Economic Requirements System

(HERS)

CGE Model:

U.S. Applied General Equilibrium

(USAGE)

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Policy

Baseline

Chart 1. Paths of federal highway capital

expenditure (2010$m)

Exogenous shock in both HERS and USAGE

Chart 2. Deviation in highway capital expenditure as

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Chart 3. Maintenance cost saving with increased

spending (2010$m)

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in USAGE

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Passenger

Trucking

Chart 4. Percentage effects of policy on vehicle

operating costs per mile travelled

Endogenous result from HERS, exogenous shock in USAGE introduced as general

input-saving technical change in trucking and public & private passenger transport

Chart 5. Percentage changes in fuel use per mile,

specific category of operating costsEndogenous result from HERS, exogenous shock in USAGE introduced as fuel-using

technical change in trucking and public & private passenger transport

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Chart 6. Extra medical costs associated with increased

highway investment expenditure ($m 2010 prices)

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welfare enhancing increase in medical expenditures by households

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Total extra fatalities

Chart 7. Extra fatalities associated with increased

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Chart 8. Percentage reductions in time per VMT associated with

increased highway investment

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in labour productivity in trucking and leisure & labour supply for households

Outputs from the CGE model:

USAGE

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Deficit financed

Lump-sum tax

Petroleum tax

Chart 9. Aggregate employment

(percentage deviations from baseline)

Factors determining employment paths: (1) Multi-factor productivity(2) Terms of trade(3) Labour intensity of expenditures(4) Labour supply

Chart 10. Aggregate welfare

(% deviations from baseline)

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Deficit financed

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3. Concluding remarks

CBA models such as HERS include expertize beyond economics and cover variables

(e.g. travel time, vehicle operating costs, highway maintenance, transport-related

medical costs, fatalities) not usually included in economic models

We modified USAGE so that it could accept HERS variables. Required interaction with

engineers - moving outside the comfort zone for economists

CGE offers a method for translating CBA results into economy-wide outcomes

This translation is aimed at improving the political effectiveness of detailed cost/benefit

analysis carried out by the U.S. Department of Transportation