Partial Equilibrium Framework Research Articles

Gravity-Based Tools to Assess the Impact of Tariff Changes: An Application to Armenia

This paper uses two empirical tools to quantify the impact of tariff changes on bilateral trade and welfare. Both tools are rooted in structural gravity literature. The first tool estimates the impact of tariff changes on bilateral trade for 5,020 products in a partial equilibrium framework. The second tool quantifies the impact on bilateral aggregate trade in a general equilibrium setup, allowing estimates of trade diversion and welfare changes. These tools are used to estimate the impact of tariff changes on Armenia with regard to (i) its alignment with the external tariff of the Eurasian Economic Union; (ii) free trade agreements between the Eurasian Economic Union and other economies, including Iran and the People’s Republic of China; and (iii) Armenia’s loss of beneficiary status under the Generalised Scheme of Preferences of the European Union.

The Economic Value of Pollination Services for Seed Production: A Blind Spot Deserving Attention

AbstractAnimal-mediated pollination is important for agricultural seed and crop production, and critical to overall ecosystem health. However, the scientific literature focused on the economic valuation of pollination services has thus far neglected the role of pollination services in seed production. The marketed food output of many crops is not dependent on pollination services, but these crops indirectly depend on pollination services with respect to their seed production. This study proposes a partial equilibrium framework for identifying the value of pollination services. Using Germany as a case study, we find the value of pollination services is about 33% higher when seed production is considered. This increased valuation is driven by two effects: higher seed costs due to high dependence on pollination services, and a higher demand for seeds due to the land expansion needed to mitigate a potential pollinator collapse. This study demonstrates that more sophisticated approaches are needed to estimate the economic value of pollination services more accurately.

The study on the effect of restrictive rosewood trade policies on China’s rosewood import prices

PurposeRosewood, as the most internationally traded endangered species, is subject to a series of restrictive trade policies globally. China has historically been the largest importer of rosewood in the world. The fluctuation of China’s rosewood import prices will have a profound impact on the global rosewood trade pattern. This study, therefore, assessed the impact of restrictive trade policies on China’s rosewood import prices to explore the fluctuation rule of rosewood trade prices under restrictive policies.Design/methodology/approachThe study built a partial equilibrium framework about the formation mechanism of rosewood import price bubbles under supply constraints. On this basis, with China’s daily import prices of major rosewood species, the generalized supremum augmented Dickey–Fuller (GSADF) and backward supremum augmented Dickey–Fuller (BSADF) tests were applied to explore the effect of restrictive trade policies on China’s rosewood import prices.FindingsThe empirical analysis revealed that there were multiple price bubbles for five of the seven rosewood species. The largest bubbles were always created before and after the deployment of supply constraints. The empirical results for the counterfactual examples implied that price bubbles would not have occurred if restrictive rosewood trade policies had not been implemented. The above findings indicated that these measures tended to trigger significant price bubbles in China’s rosewood imports.Originality/valueThe effect of restrictive rosewood trade policies on rosewood trade prices had not yet been explored in previous research studies. This study empirically analyzed the effect of restrictive trade policies on China’s rosewood import prices using econometric models.

Container shipping: A market equilibrium perspective on freight rates formation post-Covid-19

The unprecedented container shipping freight rate levels post-Covid-19 are studied in a stochastic dynamic partial equilibrium framework. The proposed container marked model is calibrated on annual aggregate data from the two recent decades. The observed freight rate levels in 2021 and 2022 match a switch of competitive equilibria from Bertrand to Cournot competition. Whereas increased costs and reduced productivity play a role in explaining freight rates, these factors alone appear not to be able to justify the high post-Covid-19 freight rate levels.

Export‐platform foreign direct investment and trade policy uncertainty: Evidence from brexit

AbstractThis paper analyses the effect of trade policy uncertainty in a customs union on export‐platform foreign direct investment (FDI). First, I develop a partial equilibrium framework with heterogeneous firms based on the proximity–concentration trade‐off that involves trade policy uncertainty about trade costs inside a customs union. Second, I derive an empirical equation that I test by exploiting the 2016 Brexit referendum as a natural experiment and using data on manufacturing greenfield FDI projects. The results show that trade policy uncertainty impacted negatively the decisions of firms to invest in export‐platform activities in the UK following the Brexit referendum. Moreover, I find that extra‐EU manufacturing firms preferred EU countries as opposed to the UK for new investments after the 2016 referendum.

Trade liberalization, wilful credit defaults and bank bribery in a credit‐constrained economy

AbstractThe rising incidence of credit defaults may cause credit crunch. This affects the ability of firms to finance working capital and also fixed capital formation. Naturally, this is a major macroeconomic shock. This paper is an attempt to address the microeconomic foundation of such macroeconomic shock. We provide a theoretical framework to explain the economic rationale behind ‘wilful corporate defaults’ and ‘financial corruption’ in the specific context of trade liberalization. First, we model the behavioural aspects of wilful corporate defaulters and bank officials to determine the bank bribe rate as an outcome of the Nash bargaining process in a two‐stage sequential move game. Based on the results of the partial equilibrium framework, we examine aspects of trade liberalization in an otherwise 2 × 2 general equilibrium framework. We also compare the efficacy of punishment strategies to economic incentives to deter credit defaults and banking sector corruption. Methodologically, our analytical model integrates finance capital distinctly from physical capital in Jonesian general equilibrium framework. Interestingly, our findings indicate that there exists a trade‐off at equilibrium between curbing credit defaults and bribery. We also find that not all punishment strategies are equally effective at deterring credit defaults if general equilibrium interlinkage effects are carefully dealt with.

On market power and inflation

We study the connection between inflation and market power in a partial equilibrium framework with both demand and cost shocks. We derive a specific condition under which cost shocks increase market power. Conversely, when the condition is not satisfied then it is demand shocks that increase market power. Moreover, exogenous changes in the degree of competition can either shrink or amplify the effect of either type shocks on equilibrium price. Our results complement those of Menezes and Quiggin (2022) and further enrich the recurrent debate surrounding the role of market power on inflation.

Cheap chicken in Africa: Would import restrictions be pro-poor?

Europe’s chicken exports to Africa have long been criticised for their negative effects on local producers. However, while cheap chicken imports may hurt African poultry farmers, the same cheap imports benefit African consumers and improve their access to affordable nutrients. A few African countries have established import restrictions, but it is unclear how such policies affect different population groups and whether the potential benefits for farmers outweigh the broader social costs. We use nationally representative household data from Ghana and a partial-equilibrium framework to simulate domestic household supply, consumption, and overall welfare effects of two hypothetical policies, namely a 50% import tariff on chicken and a complete import ban. Our results suggest that both policies would lead to increased domestic chicken prices with negative consumption effects that are much larger than the positive supply effects. Average poor and non-poor households in rural and urban areas would suffer welfare losses from these import restrictions. While many households purchase and consume chicken, relatively few produce chicken and only very few sell any chicken in the market. The findings imply that chicken import restrictions are not a pro-poor and welfare-enhancing policy. To compensate the few households particularly hurt by cheap chicken imports, targeted support measures would make more sense economically and socially than general import restrictions.

Centrality dependence of proton and light nuclei yields as a consequence of baryon annihilation in the hadronic phase

The centrality dependence of the p/π ratio measured by the ALICE Collaboration in 5.02 TeV Pb-Pb collisions indicates a statistically significant suppression with the increase of the charged particle multiplicity once the centrality-correlated part of the systematic uncertainty is eliminated from the data. We argue that this behavior can be attributed to baryon annihilation in the hadronic phase. By implementing the BB¯↔5π reaction within a generalized partial chemical equilibrium framework, we estimate the annihilation freeze-out temperature at different centralities, which decreases with increasing charged particle multiplicity and yields Tann=132±5 MeV in 0-5% most central collisions. This value is considerably below the hadronization temperature of Thad∼160 MeV but above the thermal (kinetic) freeze-out temperature of Tkin∼100 MeV. Baryon annihilation reactions thus remain relevant in the initial stage of the hadronic phase but freeze out before (pseudo-)elastic hadronic scatterings. One experimentally testable consequence of this picture is a suppression of various light nuclei to proton ratios in central collisions of heavy ions.

MUSE: An open-source agent-based integrated assessment modelling framework

Integrated assessment models (IAMs) are a cornerstone of an effective approach to climate change mitigation. Despite the variety of methodologies for characterising the energy system, land use change, economics, and climate response, the modelling community has an open and urgent request for tools capable of more realistic interpretation of the energy transition, capturing human behaviour, and embodying the principles of transparency, reproducibility, and flexibility of use.This paper presents an open-source modelling framework designed to fill that gap. Named MUSE (ModUlar energy systems Simulation Environment), this new agent-based model supports flexible characterisation of agent decision-making, including individual goals, bounded-rationality, imperfect foresight, and limited knowledge during the decision process. MUSE integrates this agent-based approach in a partial-equilibrium framework and enables a technology-rich description of the energy systems with an unprecedented degree of flexibility for including technological, temporal, and geographical granularity. The structure of MUSE creates the ability to produce climate change mitigation assessments that are more grounded, and more tangible model outputs for conceiving effective approaches to mitigation. MUSE is available open source under a GNU General Public License v3.0 on GitHub at this link https://github.com/SGIModel/MUSE_OS.

Rooftop solar PV and the peak load problem in the NEM's Queensland region

Over the period 2016–2021 Australia's National Electricity Market (NEM) experienced an investment supercycle comprising 24,000 MW of renewables. One of the more intriguing aspects of the supercycle was a partial shift of investment decision-making from utility boardrooms to households – rooftop solar PV comprised 8000 MW of the 24,000 MW total. In NEM regions such as Queensland, take-up rates have now reached 41.8% of households, currently the highest take-up rate in the world. There is a distinct mismatch between residential peak demand and solar PV output, which tends to suggest any peak load problem will be exacerbated. When the contribution of rooftop solar PV is abstracted to the power system level these results reverse. The partial equilibrium framework of Boiteux (1949), Turvey (1964) and Berrie (1967) has historically been used to define the optimal plant mix to satisfy demand growth. In this article, their partial equilibrium framework is used to define conventional plant ‘dis-investment’ in the presence of rising rooftop solar PV and utility-scale renewables in an energy-only market setting. Queensland's 4400 MW of rooftop solar displaces 1000 MW of conventional generation in equilibrium, 500 MW of peaking plant and somewhat counterintuitively, 500 MW of baseload coal plant – falling ‘minimum system demand’ being a driving factor. The NEM's energy-only market and its $15,000/MWh price cap proves tractable through to a 50% renewable market share, but relies critically on frictionless coal plant divestment and bounded negative price offers.

Trade liberalisation in Kenya: A modelling linkage for wheat and maize

Kenya has become a driving force of trade integration at the regional and continental level, albeit that this process is still incomplete. Kenya was the first nation, along with Ghana, to ratify the African Continental Free Trade Area (AfCFTA) agreement in May 2018, as it was already engaged with its main trading partners. Trade policy can generate mixed effects across the economy and within the agricultural sector, reflecting differences between markets and commodities. In this paper we argue that a mix of modelling approaches is preferable in order to capture the complexities of these changes. A dynamic-recursive computable general equilibrium model provides broad sectoral and macro-economic effects, which are then incorporated into a partial equilibrium framework for a detailed analysis at the sector level. We demonstrate this using the maize and wheat markets in Kenya as examples. Combining the output of each modelling approach allows the analysis to explicitly include certain characteristics of single markets, particularly regional trade relationships and differences in pricing structure that would be missed by using a single approach in isolation. It shows that further intra-African trade liberalisation will affect wheat markets more than maize in Kenya but, given the low initial tariff levels, the ultimate effects will remain fairly small.

The cost-benefit comparisons of China's and India's NDCs based on carbon marginal abatement cost curves

Incorporating co-benefits of carbon abatement policies can offset costs and inspire greater and faster reductions in emissions in many cases. Most studies on co-benefits are carried out within a partial equilibrium framework and ignore the general equilibrium effects. Therefore, using a computable general equilibrium model, this study incorporated the co-benefits of carbon abatement policies into the carbon marginal abatement cost curves (MACCs), and evaluated the total abatement costs and cost-saving effects for China and India to achieve their Nationally Determined Contributions (NDC) target. The results indicate that the original carbon MACCs of India in any given year are generally higher than those of China; however, after considering the air pollution-related co-benefits, the overall level of the revised MACCs in China is slightly higher than that of India from 2020 to 2030. In the composition of total co-benefits in China and India, the co-benefits of SO2 reductions account for more than 80% of national total co-benefits, followed by the co-benefits of NOx and PM2.5 reductions. Furthermore, if co-benefits are considered, whether it is China or India, the marginal abatement costs and total abatement costs to achieve NDC targets can be effectively offset; but in comparison, India has more significant cost-saving effects, while for China it will be more difficult to reduce emissions in the latter half of the process of achieving NDC targets. These findings are helpful for developing countries in coordinating and strengthening their ability to tackle climate change and environmental protection.

Accessible Modeling of the German Energy Transition: An Open, Compact, and Validated Model

We present an easily accessible model for dispatch and expansion planning of the German multi-modal energy system from today until 2050. The model can be used with low efforts while comparing favorably with historic data and other studies of future developments. More specifically, the model is based on a linear programming partial equilibrium framework and uses a compact set of technologies to ease the comprehension for new modelers. It contains all equations and parameters needed, with the data sources and model assumptions documented in detail. All code and data are openly accessible and usable. The model can reproduce today’s energy mix and its CO2 emissions with deviations below 10%. The generated energy transition path, for an 80% CO2 reduction scenario until 2050, is consistent with leading studies on this topic. Our work thus summarizes the key insights of previous works and can serve as a validated and ready-to-use platform for other modelers to examine additional hypotheses.

Policy Impact on Regional Biogas Using a Modular Modeling Tool

Biogas development is expected to contribute to the National Recovery and Resilience plan to overcome the COVID-19 shock. Estimation of the agricultural biogas potential in economic terms can contribute to refining policies inciting effective sector development. In this paper, we attempt to do so by modeling a biogas chain from dedicated crops and livestock waste. This was achieved by coupling farming models to the biogas industry in a partial equilibrium framework. This allows for a comprehensive investigation of alternative measures in technology, size, spatial distribution and land use change. The integrated model was implemented in Lubelskie for the previous policy (green certificates) and the current policy (auction market). In both cases, the bottom-up profit driven optimization resulted in approximately 40 MWel, which shows a robust economic potential more than four times the biogas sector’s actual capacity in the region, also providing the detailed structure of the sector. When focusing on the industry structure, both scenarios give similar results regarding 1–2 MWel plant size close to the observed situation. The model also suggests a large number of new facilities <250 kWel, twice as important under scenario 2, indicating that other conditions beyond economy profitability should be fulfilled for further sector development.

Practical partial equilibrium framework for pricing of mortality-linked instruments in continuous time

Practical partial equilibrium framework for pricing of mortality-linked instruments in continuous time

Cyclical drivers of euro area consumption: What can we learn from durable goods?

We study the cyclical dynamics of consumption in the euro area (EA) and the large EA countries by distinguishing durable from nondurable expenditures. We adopt a theoretical partial equilibrium framework to justify the identification strategy of our empirical model, a time-varying parameter structural vector autoregression (TVP-SVAR). Following the main insight from the theoretical model, that liquidity constraints induce important interactions between durables and nondurables, we distinguish durable-specific demand and supply shocks, while taking into account monetary and credit conditions. Our main findings are: (i) durables react faster and more strongly than nondurables after monetary shocks in the euro area and in the largest EA countries, a confirmation of an outcome commonly reported for the US; (ii) there is a large degree of cross-country heterogeneity in how different factors (including durable-specific ones) explain consumption; (iii) the strength of spillovers from durable to nondurable consumption, as predicted by theory, is empirically correlated with how much households across countries are likely to be liquidity constrained.

Practical Partial Equilibrium Framework for Pricing of Mortality-Linked Instruments in Continuous Time

In this article we demonstrate the practical application of standard partial equilibrium, in backward stochastic differential equation (BSDE) framework, to pricing longevity bonds which are essential for functioning of the life market. The market for mortality linked instruments or so-called life market, is experiencing steady progress in its evolution (see Blake et al. (2018)), however, it is regretfully far from reaching its full potential estimated to be of tens of trillions of dollars (see Michaelson and Mulholland (2014)). Highly illiquid and, compared to equity markets, with a relatively very low number of transactions, the life market is comprised of series of negotiated, high monetary value, over-the-counter transactions between few agents that have different risk preferences. To accommodate these realities we demonstrate an application of a partial equilibrium framework for pricing longevity bonds. We do this under the assumption of stochastic mortality intensity that affects the income of economic agents who trade in risky financial security and longevity bond to maximize their monetary utilities. Thus, by rooting ourselves in a foundational economic principle, as a practical contribution, we find the endogenous equilibrium bond price which is numerically computed. In a realistic setting of two agents in a transaction, numerical experiments confirm the expected intuition of price dependence on model parameters. As a theoretical contribution, we prove that our longevity bond completes the market.

Domestic and international impacts of the rice trade policy reform in the Philippines

Faced with high domestic rice prices that have fueled inflation above the 2018 target and penalized poor consumers the most, the government of the Philippines has decided to abandon the quantitative restrictions on imports and replace them with tariffs. This paper uses a global rice model based on a partial equilibrium framework to assess the possible impacts of this reform on imports, production, consumption and prices. In contrast with past similar studies, we address three key concerns (i) the heterogeneity in farm price across 16 regions in response to the combined effect of the tarriffication and the average historical trend in productivity increase at 1.5% between 2001 and 2018, (ii) the differentiation of imports by origin partly due to the different tariffs applied to countries within and beyond the Association of South East Asian Nations, and (iii) the effect on domestic prices in third countries. The simulation results suggest that the reform would increase imports by 2.47 million tons (20.7%) in 2019. We also find a large decline in farm prices and retail prices respectively by PhP 6.1/kg (30.1%) and PhP 7.6/kg (17.4%) in 2019 that explains an increase in rice consumption. We estimate the fall in total inflation at 1.2% in 2019 but less over time. Further, the large fall in farm prices in 2019 is shared quite evenly among regions in the short term but returns to pre-reform levels in the near term. Using a higher price elasticity of supply for one region obtained from panel data surveys, we show a more pronounced decline in production than the national average. Such differentiated results confirm the relevance of using a regionally disaggregated model to design more targeted policies. We also show a slight increase in world prices, which led to small increases in the domestic prices of South and Southeast Asian rice markets. While this reform is largely pro-poor consumers, policy makers would need to use the additional tariff revenue to help rice growers either increase their competitiveness and modernize their rice production or shift to other crops.

The opportunity cost of domestic oil consumption for an oil exporter: Illustration for Saudi Arabia

We develop a partial equilibrium framework to assess the opportunity cost of domestic oil consumption for an oil-exporting country. We show that the opportunity cost depends on various factors, including the constraints to which the oil producer is subject and the domestic oil pricing scheme. Moreover, through an application of the envelope theorem, we assess net welfare gains that can be generated from a reform of the domestic oil price. Our results show that the most efficient pricing policy is to set the domestic price equal to the opportunity cost. A numerical illustration for Saudi Arabia is provided to demonstrate the practical value of the proposed framework. Our findings can inform public decision-making for projects and policies that impact oil demand. • A partial equilibrium framework provides formulas for the opportunity cost under sectoral constraints and pricing schemes. • The opportunity cost of oil consumption can be significantly less than the world market price. • The envelop theorem produces a practical formula to quantify the welfare gain generated by a domestic price reform. • The most efficient domestic pricing policy is to set the price of oil equal to its opportunity cost. • The value of the opportunity cost may depend on the persistence of the project’s (or policy shift’s) effects on oil demand.