Water and Economy-Wide Modeling: An Overview

Abstract

General equilibrium theory thinks of the economy as a collection of interconnected markets, each of which, in isolation and in combination, is driven toward some sort of equilibrium. Computable general equilibrium (CGE) models add to this abstract point of view by calibrating models of the economy using actual economic data. The aim is to empirically solve for equilibrium demand, supply, and price levels across the markets in the economy. Many areas of economic analysis, reform, and policymaking have benefitted from scrutiny in a CGE context. This is particularly true of issues to do with tax and tariff reform, where CGE models first gained prominence. More recently, the areas of environmental economics and regulation has attracted the attention of CGE modelers. Considerations of environment and environmental regulation, inevitably involve a consideration of issues to do with water. Such issues range from aquaculture through pricing of water to virtual water—and many points in between. In the analysis of each of these issues—and the role water plays in the overall economy, CGE models have made an important contribution to understanding and informed policymaking.