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-
pC

α α O0Yd
ι
= ι+——

w

H - H' + β1mAm tYr.,

MED =m     +α3Y

β2         pMED


with


Z        Ч _        H - H * + β, mA

Yd = w I T-θ,A, 1 + P - PcC - wl - Pmed--------m-----

m J                                β2


(6)

(7)

(8)

(9)


Yd 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
Yd 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=αi1ln(xi-xi
i =1


(10)


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


This subutility function is maximised subject to the budget constraint


12

pixiYC
i=1


(11)


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


allocated to C (YC=pC.C).




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