Computable General Equilibrium Models for the Analysis of Economy-Environment Interactions

This chapter is an introduction to the subject of computable general equilibrium (CGE) modeling in environmental and resource economics. CGE models are a widely-used tool for the quasi-empirical analysis of environmental externalities—and policies for mitigating them—which are large enough to influence prices across multiple markets in the economy. We provide a simple, rigorous, and practically-oriented exposition that develops the framework of a CGE model from microeconomic fundamentals, outlines how the resulting algebraic structure may be numerically calibrated using the economic and environmental data and then solved for the equilibrium values of economic variables, and illustrates how CGE simulations may be used to analyze the economy-wide impacts of environmental externalities and associated mitigation policies. ∗Rm. 461, 675 Commonwealth Ave., Boston MA 02215. Phone: (617) 353-5741. Email: [email protected].