How to build a theoretical model II
- consumer behaviour
- natural environment
Consumer behaviourIn general, economic models describe consumers as choosing between different goods while being subject to a budget constraint. However, in environmental economic models, we focus on emissions so that the choice among different goods is not that important, but we rarely need much sophistication for the consumer side, and thus usually extend the model of firm behaviour in the simplest possible way.If we have selected the Emission Choice Model for firm behaviour, there is very little to do for depicting consumer behaviour. The Emission Choice Model describes only emissions. Thus, in the case of the Emission Choice Model, we only add a damage function to our description of firm behaviour.If we selected the Output Abatement Choice Model, firms produce output and emissions. On the consumer side, we thus have to describe the well-being derived from consuming the product and the damage caused by emissions.In case of the Input Choice Model, we’ve also to describe where the inputs come from. Thus, we will usually need a model that describes labour supply, capital supply, and the supply of all other factors.
Markets and the natural environmentIn most cases, we can use balancing equations to both ends. A market is modelled by assuming that what flows into the market has to equal what is drawn from the market. We already used this approach in our first example where we assumed that two firms on the permit market trade a fixed number of permits.
Exploring Possible Futures: Modeling in Environmental and Energy Economics
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