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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
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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
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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
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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
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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
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1. Introduction to CGE modeling: the USAGE
model and I-O database
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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
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USAGE input-output database
(contains 11m value flows) Prod-
ucers
Invest-
ors
House-
holds
Exports Govt
Size I I 1 1 1
Basic Flows
CS
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Margins
CSN
.
Sales Taxes
CS
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Labour
M
Capital
1
Land
1
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2. CBA/CGE assessment of the effects of
increased highway expenditure in the U.S.
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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$m)
Exogenous shock in both HERS and USAGE
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Chart 2. Deviation in highway capital expenditure as
% of GDP
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Chart 3. Maintenance cost saving with increased
spending (2010$m)
Endogenous result from HERS, exogenous shock
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
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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)
Endogenous result from HERS, exogenous shock in USAGE introduced as non-
welfare enhancing increase in medical expenditures by households
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Total extra fatalities
Chart 7. Extra fatalities associated with increased
highway investment expenditure
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reduction of $7m (2010 prices) per fatality
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Trucking
Chart 8. Percentage reductions in time per VMT associated with
increased highway investment
Endogenous result from HERS, exogenous shock in USAGE introduced as change
in labour productivity in trucking and leisure & labour supply for households
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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
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Chart 10. Aggregate welfare
(% deviations from baseline)
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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