Environmental Policy on the Back of an Envelope: A Cobb-Douglas Model is Not Just a Teaching Tool

34 Pages Posted: 26 Feb 2019

See all articles by Don Fullerton

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Chi Ta

University of Illinois at Urbana-Champaign

Multiple version iconThere are 2 versions of this paper

Date Written: February 2019

Abstract

To clarify and interpret the workings of a large computable general equilibrium (CGE) model of environmental policy in the U.S., we build an aggregated Cobb-Douglas (CD) model that can be solved easily and analytically. Its closed-form expressions show exactly how key parameters determine the sign and size of effects from a large new carbon tax on emissions, revenue, prices, output, and welfare. Data and parameters from the detailed, dynamic CGE model of Goulder and Hafstead (2018) are used in the CD model to calculate results that can be compared with theirs. Results from the CD model track those from the large CGE model quite closely, even though the CD model omits much detail such as the number of sectors, intermediate inputs, and international trade. A CGE model is quite useful to generate detailed numerical results and to reflect on particular aspects of environmental policy, but the simpler CD model provides a transparent view of exactly how the policy affects key outcomes.

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Suggested Citation

Fullerton, Don and Ta, Chi, Environmental Policy on the Back of an Envelope: A Cobb-Douglas Model is Not Just a Teaching Tool (February 2019). NBER Working Paper No. w25582. Available at SSRN: https://ssrn.com/abstract=3341242

Don Fullerton (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

Chi Ta

University of Illinois at Urbana-Champaign ( email )

1408 W. Gregory Dr.
Urbana, IL 61801
United States

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