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Macroeconomic Impacts of Microeconomic Damages in General Equilibrium: Productivity and Capital Losses

Author

Listed:
  • Marc A. C. Hafstead
  • Roberton C. Williams III

Abstract

The full economic costs and macroeconomic effects of microeconomic damages associated with pollution damages, climate impacts, and similar negative shocks are not well understood. Beyond the direct damages, market distortions, supply chains, changes in capital and labor costs, etc. can potentially magnify (or diminish) the costs of these shocks. In this paper, we use analytical and numerical general equilibrium models to investigate the channels through which microeconomic shocks affect the macroeconomy. We model different types of shocks, evaluate how anticipation affects the macroeconomic implications of shocks, and measure the overall welfare costs relative to the value of direct damages. We find that preexisting taxes magnify the overall welfare costs relative to direct damages, that savings and investment decisions driven by anticipations of certain types of shocks can interact with tax distortions to lower welfare costs, and that the ratio of welfare cost to direct damages varies substantially across sectors of the economy.

Suggested Citation

  • Marc A. C. Hafstead & Roberton C. Williams III, 2026. "Macroeconomic Impacts of Microeconomic Damages in General Equilibrium: Productivity and Capital Losses," NBER Working Papers 34661, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34661
    Note: EEE
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    More about this item

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D60 - Microeconomics - - Welfare Economics - - - General
    • E0 - Macroeconomics and Monetary Economics - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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