Imperfect Markets and the Properties of Macro-economic-environmental Models as Tools for Policy Evaluation

Economic-Environmental Models are deeply disaggregated macro-economic systems, which are used in economic environmental studies to explain the emissions of pollutions and the extraction of resources. Concerning the economic base two approaches can be differentiated – the neoclassical and the Keynesian paradigm. Models based on the neoclassical paradigm are depicting equilibrium of perfectly competitive markets, whereas the models based on the Keynesian paradigm have been developed from a critical position vis-a-vis neoclassical theory stressing the importance of market imperfections. The paper at hand shows in its theoretical part that this fundamental difference to a large extent is responsible for differences in modeling results concerning the impact of policy instruments on the economy and the environment. Furthermore the two paradigms prefer different ways of parameterization which has consequences for the empirical validation of the models, the construction of the references and the effects of environmental policy. The paper at hand further shows that the theoretical arguments allow explaining the totally different and partly opposite results of concrete policy simulations in the POLFREE project, where the large scale economic environmental models EXIOMOD (neoclassical) and GINFORS (Keynesian) have been used.