Modelling the health related benefits of environmental policies - a CGE analysis for the eu countries with gem-e3

11

The consumer’s maximisation problem gives rise to the following demand

functions:

α⁰Y ^d

C = C + ^α1Y-
p_C

α α O0Y^d
ι = ι+——

w

H - H' + ∑ β1mAm _tY_r.,

MED =^m     +^α3Y

^β2         ^pMED

with

Z        Ч _        H - H * + ∑ β, mA

Y^d = w I T-∑θ,A, 1 + P - PcC - wl - Pmed--------m-----

∖ m J                                ^β2

(6)

(7)

(8)

(9)

Y^d is the disposable income that can be allocated to the consumption of C, l and MED. A

higher level of air pollution increases the demand for medical care, through equation (3)
Secondly, it has a downward impact on the consumption of C, l and MED because it
diminishes disposable income Y^d in two ways: it increases the subsistence level of
medical consumption and it reduces total available time.

At the lower level of the nested LES function, C is allocated over twelve

commodities (excl. medical care), as in the standard GEM-E3 model. The consumer is

assumed to maximise

¹² / —

C=∑α_i¹ln(x_i-x_i
i =1

(10)

in which xi stands for the consumption of commodity i and x_i is the subsistence level.

This subutility function is maximised subject to the budget constraint

12

∑p_ix_i≤ Y_C
i=1

(11)

which states that spending allocated to commodities 1 to 12 cannot exceed the budget

allocated to C (YC=pC.C).