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Abstract
In this study a computable general equilibrium model is developed and implemented. The model is employed to examine the effects of the Swedish road investment programme 1988-1997 on prices, consumption, production, allocation of resources, the public sector budget, the trade balance as well as the associated changes in welfare.
A model of an open economy is used since some benefits may be exported to other countries. An important element in the model design is a three-level nesting structure in the demand for commodities. The utility of each consumer is described by a utility function with constant elasticity of substitution, i.e. a CES-utility function. Production of each commodity is also described by a function with constant elasticity of substitution. The capital of transport infrastructure is specified as an input in the production functions in order to analyze the potential effects on productivity outside the transportation sector. The public sector is modelled as a separate agent and linked to the rest of the model through its taxes, transfer of incomes to the households and public expenditures. The transportation activities are specified in the same way as the production of commodities, i.e. by CES production functions. By means of this specification it is possible to simulate the influences from the road investment programme on productivity within the transportation sector. Compensating variation (CV) and equivalent variation (EV) are used as measures of welfare change.
Alternative values of infrastructure elasticity in the production functions are tested. According to the results, the value of the elasticity chosen is of vital importance for the profitability of the investment programme. The relation between the cost savings and the change in welfare is a classical issue in transportation research. The cost saving measure will give a considerable underestimation of the welfare change when infrastructure-depending productions functions are applied. However, in the case of zero elasticity of infrastructure in the production functions, the cost saving measure will overestimate the welfare outcome of Sweden. It is shown that between 20 and 30 percent of total benefit is transmitted to consumers abroad. The change in welfare will slightly exceed the cost savings when these benefits are included in the calculation. Four approximate welfare measures--consumer surplus and the Paasche, Laspeyres and Harberger index--are tested by examining their relationship with CV and EV. Estimated changes according to Harberger index are almost identical with the mean-value of CV and EV. Approximation errors associated with the consumer surplus measure are considerable, while changes estimated by the Paasche and Laspeyres measures are very close to CV and EV, respectively.
In the planning process in Sweden an extra cost of 25 percent is added to the investment cost because of "excess burden". There is no such extra cost according to the simulation results. Annual surpluses, generated by the accomplished investment programme, will counterbalance the investment cost. It is also shown that each region is better off by the investment programme. This conclusion is valid for all alternative ways of balancing the budget. However, the variation in the outcome of each region is considerable. In particular, the distribution of welfare among regions is sensitive to alternative ways of financing the investment costs.
