13
with
1
1-σj
Dj =
dKjr1-σj +dLj
uɪ - γ( 4.-∙ Am ))J
(14)
2.4. The health impacts of air pollution on the government budget
The standard GEM-E3 model distinguishes nine sources of government revenue:
indirect taxes (mainly excises). value added taxes. production subsidies. environmental
taxes. social security contributions and transfers. import duties. foreign transfers and
revenue from government firms.
In the extension of the GEM-E3 model an increase in air pollution affects the
government budget directly. through the increase in total subsidies for medical care. In
addition. the government budget is affected indirectly through the impact of air
pollution on the consumption of taxed commodities and labour supply.
2.5. The parameters for implementing the feedback in GEM-E3
Implementing the model requires the determination of the parameters of the
utility function. the health production function and the production functions to take into
account the air pollution externalities. First. we discuss the different components needed
for the calibration of the consumer utility function and the production functions. Then
we present briefly the environmental cost estimates provided by the European research
project ExternE (1996. 1998. 2000) and describe their decomposition into components
that are relevant to our analysis. As in ExternE. the approach for the calibration derives
the parameters corresponding to marginal damage. i.e. changes with respect to a
reference situation.
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