Modelling Transport in an Interregional General Equilibrium Model with Externalities



5.3 Effects on real economic activity from changes in cost and prices, with and without
externalities

Real economic activity is influenced by the changes in prices. In addition, the way the
revenues from the road pricing is recycled for example either through reduction in taxation or
through increases in public consumption, will influence the level of economic activity. In this
study only the gross impacts of cost and price changes are presented as the focus of the study
is the multiplier effects of inclusion of externalities in the analysis. For a treatment of the
public sector see Madsen et al (2005).

In this section the results of changes in real economic activity are described. First, the
results of a model calculation without externality effects are shown in table 4a. This is
followed by an analysis of the consequences of inclusion of pecuniary externalities (table 4b)
and then of urban externalities (table 4c).

The first step, where externality effects are not included examines the impacts on
disposable income and private consumption (table 4a, column 1-4). Disposable income in
current prices is reduced in average by 0.21% (column 1) because of the income reduction
arising from road pricing on commuting. Second, real disposable income is reduced, because
prices of private consumption increase. In total, real disposable income is reduced by 0.96%
(column 2), which in turn reduces private consumption by 0.96 both at place of residence
(column 3) and at place of commodity market (column 4). Demand is reduced, but
proportionally less because the real impacts on other components of demand (intermediate
consumption) is smaller or even unchanged (public consumption and investments).

When including the externality effects (see tables 4b and 4c) there are 2 consequences,
which have opposite signs: First, increases in income arising from wage increases related to
road pricing (wage compensation), which increase private consumption and demand. Second,
wage increases raise export prices and domestic prices which means that exports to abroad
decline and imports from abroad increase, reducing domestic production. The second effect,
based upon declining competitiveness dominates. The reduction in production will be even
greater when including the externality effects.

The next step is to include pecuniary and technological externalities in the direct effects.
The impact of these affects real wages, as shown above. The effects going from real wages to
GVA are presented in column (1) of table 4b (pecuniary externalities) and table 4c (urban
externalities). The effects are transmitted through the economic system in the same way as
described in relation to table 4a.

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