Economic and mathematical modeling of energy subsidies effects: principle of validity

Abstract

This article presents an approach to the validity investigation of the economic models that are used for the energy subsidies impact assessment: general equilibrium, partial equilibrium and “input-output” models. Validity analysis is performed for two key directions: qualitative (epistemological) and quantitative (praxiological). In the process of qualitative validity study, this paper investigates internal connections’ structure of the studied object as well as possibilities of key object features representation using analyzed modelling tools within the given economic problem. For this purpose, an adapted structural diagram, which represents energy subsidies effects, is applied. On the basis of this diagram adopted models features are compared with respect to the subsidization processes key features representation. Taking into consideration properties of the adopted models, as well as special aspects of the subject area, three main fields of the epistemological validity expertise are suggested: comparison of historical data and calculation results; comparison of historical data and modelling tools single elements activity; and exogenous parameters estimation based on the historical data. In the context of selected fields, critical analysis of modelling tools opportunities to meet determined quantitative validity criterions is performed. Considering results of represented models qualitative and quantitative validity analysis, a certain priority, within defined criteria, may be given to general equilibrium modelsthat represent key elements of the studied subject in a more complete way and have better features for empirical calibration. Meanwhile, powerful set of the aforementioned models’ exogenous variables induces the necessity to nominate additional assumptions about parameters’ values and, consequently, leads to an increase in the number of alternative scenarios and uncertainty of point estimates.

Presented in this paper approach to the modeling tools adequacy study cannot only be used for the research methods selection justification but also as a separate analysis tool aimed at deepening the understanding of studied object and subject properties within predefined goals.