The ISEEM model belongs to the category of dynamic and regional general equilibrium models. These models represent the domestic or regional economy, based on data on commerce, regional trade and micro-economic theory. The most important data sources are the exogenous parameters that determine the behaviour of producers and consumers, an initial dataset on monetary transactions and commerce within the economy and data on the transport network. The model determines the economic behaviour of a number of ‘representative’ agents. These are: consumers, producers, government, transport firms and investors. The agents in our model work, live, export and import goods and services, pay taxes and subsidies, buy transport services and are mobile between the regions of the model. Their behaviour is derived from micro-economic theory, which forms the basis of ISEEM.
The model is ‘in equilibrium’, which means that production and consumption are balanced and that all production factors (capital, labour and energy) are used. We assume that the dataset of the model in its initial state is a solution of the model. The mathematical formulas are calibrated on the dataset, such that the model replicates the initial state. Any simulation is programmed by introducing a small change in the base situation, after which a powerful solution algorithm calculates the ‘new balance’.
The application of the ISEEM model follows a number of logical steps. Any concrete policy question is first translated in a set of economic parameters that can be introduced in the model. Effects of a new tax or subsidy can be evaluated, as well as investments in infrastructure or any change in the accessibility of capital, labour or other production factors. Sometimes this requires additional data or writing new code in the model. After the set-up of the simulation, the model is applied and the results are compared to the initial state.
Results from the model are relevant economic variables and indicators. This can be the production (in monetary value) of different sectors: unemployment, welfare of different population groups, consumption, shifts in trade balance between regions, changes in commuting and transport trips, etc. Additionally, ISEEM allows calculating the effect of policy on different income groups. Any change in energy use or environmental effects can also be calculated.
Calculation of the indirect or second order effects of environmental policies
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