PNNL

Abstract

Constant Elasticity of Transformation (CET) functions are widely used to allocate land across uses in Computable General Equilibrium (CGE) models. These models fail to maintain area of land in balance. Several ways have been used or offered to fix this problem. This paper first examines the extent to which the CET approach may generate imbalances in area of land and identifies determinants of such imbalances. It then evaluates the merits, properties, and welfare impacts of the available approaches that restore area of land in balance. We show that heterogeneity in land prices (land rents) is the main source of imbalance in area of land, not the curvature of the CET function. Furthermore, we show that the available approaches that restore area of land in balance either introduce ad hoc adjustments in land allocation or undermine the conventional welfare assessments of the CET results and ignore the opportunity costs of land transformation. The CGE models which applied stochastic productivity distribution functions to allocate land among uses maintain area of land in balance, but they suffer from important limitations and ignore costs of land transformation.