Capturing the Health Effects of Environmental and Industrial Policy in a Macroeconomic Model

Abstract

Assessments of industrial or environmental policy are often based on macroeconomic models which typically neglect the effects of the policies on human health. Cost Benefit Analyses can include these effects but often in a rather simplistic manner, for example neglecting lagged effects and distributional impacts. However, it has been shown that the impacts on human health of such measures can be large and can even outweigh the standard economic impacts, as they cumulate over time.

In this chapter we discuss how health effects could be integrated fully into a macroeconomic modelling framework that can also be used to predict the levels of certain pollutants through scenario analysis. Rather than converting all the health impacts of the pollution to monetary ‘externalities’, as is standard in neoclassical economics, we outline an approach that would consider the wider implications of the direct impacts (e.g. on labour productivity or healthcare costs) to be assessed within the same modelling framework. The outputs of the model thus represent an integrated analysis of physical and economic impacts in each scenario.

The chapter discusses some of the key assumptions that are required to conduct such an analysis and demonstrates how the choice of economic model can be important in determining overall outcomes.