Discussion Papers no. 105

Consumer demand in a general equilibrium model for environmental analysis


The system of consumer demand functions for the 22 consumption goods in the general equilibrium model MSG-EE is presented. The consumer model has the following specific features. (i) It is based on a three level utility tree. At the lowest level there is much substitution between say air transport and other forms of public transportation; at the intermediate level there is considerable substitution between public transport and private transport; and at the top level there are moderate possibilities for substitution between say transport and food. (ii) The utility tree is based on non-homothetic weak separability, taking account of the fact that the Engel elasticity of say bus transport is much less than the Engel elasticity of air transport. There is perfect aggregation over goods in the utility tree, which makes it necessary to have more than one price index for commodity groups at the intermediate and the top level. (iii) The utility functions are household specific and we use perfect aggregation across all households in Norway to derive the macro demands, in which the number of households, the number of children, and the number of adults are important variables. (iv) The model is calibrated exploiting both microeconometrics and macroeconometrics, taking both random and systematic measurement errors into account.