9 - Regulations in a CGE Model

Summary

This chapter examines the treatment of regulations in a computable general equilibrium (CGE) model. Regulations are “command and control” policies that mandate changes in producer or consumer behavior. We study two types of regulations: nontariff measures that can create barriers to international trade and regulations designed to reduce negative externalities in production. We demonstrate the mechanisms used to introduce a technical nontariff measure into a standard CGE model. We describe process-based and outcome-based regulations of externalities and explain their direct and indirect economic impacts. Simple partial equilibrium diagrams illustrate the theoretical effects of the regulations on economic activity and economic efficiency. The results of highly stylized regulatory policy experiments using a CGE model support the theoretical predictions and illustrate modeling methodologies.