Dynamic Computable General Equilibrium Model and Sensitivity Analysis for Shadow Price of Water Resource in China

A novel dynamic computable general equilibrium model based on National Water Resource Input Holding Output Table is proposed to calculate the Shadow Price of water resource in China. Unlike previous approaches, the dynamic Shadow Price of water resource is largely based on the scarcity extent and can reflect the marginal long-term value in the balanced growth path of China. Firstly, the basic concepts of dynamic Input Output analysis and Turnpike Theory are reviewed. Then, Dynamic Computable General Equilibrium (DCGE) is elaborated to calculate the Shadow Price, including the definition and computer-based algorithm. Furthermore, Shadow Price of water resource in China from 1949 to 2050 is calculated based on the DCGE. Also the sensitivity analysis of the DCGE for Shadow Price of water resource in China is presented. Dynamic Shadow Price of water resource has two meanings for China government: (1) Project evaluation. Every large-scale project in China must have national economic evaluation and the dynamic Shadow Price is prerequisite for national economic evaluation. (2) Market price of water resource. A lesson from this paper is that Shadow Price of water resource in domestic market of China should be rewritten according to the dynamic Shadow Price. In addition, the parallel computations approach could also be used to solve these problems in different countries or for different natural resources. Copyright Springer Science+Business Media, Inc. 2007