Studies on Economic and Environmental Efficiency ofMakassar City in Indonesia:
AHP and CGE Modeling Approaches

Supervisor: Professor Yuzuru MIYATA

June, 2014
DOCTORAL OF ENGINEERING

Any WAHYUNITOYOHASHI UNIVERSITY OF TECHNOLOGYAbstract
Economic action and the environment affect one another’s performance.
Economicandenvironmental

changes

affectthewelfareofsociety.

Environmentalists and economists agree that indifference to the environment hascaused the depletion of natural resources and environmental degradation. The
underlying reason for the underestimation of assets is that not all environmentalgoods and services are included in the economic analysis of programs and policies.
Environmental problems must be prevented, and the damage caused by economic
development must be reduced. Economic development can be sustainable, or it
can be compatible with the viability of natural systems. Economic andenvironmental development requires an analytical instrument to evaluate the mostappropriate economic and environmental strategies.
Indonesia is a developing country that is expanding in every economic sector.
However, Indonesia’s government has scarce financial resources that must be
allocated efficiently for development. CO2 emissions and the decline of natural
resources due to of human economic activity intended to improve the standard oflife cause green-house-gases (GHG) that can alter the natural balance and theclimate-change process.
This study addresses economics and the environment using a methodology toanalyze the efficiency of resource allocation. Resource allocation is a trade-off
that can be resolved by the price mechanism. This study attempts to achieve thebest possible result for the environment while assuming the lowest possible loss of
economic objectives.

iThis study examines the following issues: (1) the provision of public goods suchas road construction on the Maros-Watampone Road; and (2) the urban economicsof Makassar City. This study applies an analytic hierarchy process (AHP) to
design efficiency with respect to selecting the best type of road construction in aconservation area. We refer to Wicksell’s theory (1977) that in a perfectlycompetitive market, a voting system returns the same results as a price mechanism
for decision-making. However, the public cannot explain references to the publicgoods. Economists have proposed a public participation method (AHP) concept
by substituting the criterion entity for the person entity. Therefore, efficiency is afeasible environmental solution where the value of one criterion can only beachieved by degrading the value of at least one other criterion. The evaluation
method to determine the efficiency of economic resources provides an integrated
framework to evaluate an investment from a public perspective. AHP enumerates
all of a particular project’s direct costs and benefits to society assigns monetary
values, discounts them to a net present value and adds them into a single number
to evaluate the project.
The Maros-Watampone Road crosses a critical geometric conservation area thatis a barrier to development. Previous studies recommend the three following
alternative constructions: an elevated bridge, a cut and fill, or tunnel system. The
government invited community members to participate in selecting the best
construction in their region. Using the AHP, the results showed that the criterionof benefits (0.300) is the major factor in determining construction priority; thesecond major factor is environmental criteria (0.224). Construction costs (0.081)

ii

and maintenance criteria (0.054) had no significant effect. An elevated bridge isthe most suitable type of construction (0.528), followed by cut and fill (0.248) andthe tunnel system (0.223). The higher contributions of benefit and environmental
criteria indicate that community preferences cannot be measured using the pricesystem. In addition to relatively large energy consumption, construction activity
simultaneously created CO2 emissions. Thus, an estimation of CO2 emissions
indicates that elevated bridge construction has lower emissions (1.31 TonCO2/km)
than tunnel construction (1.79 TonCO2/km). The decision-making process showedthat the public has begun to pay attention to quality of life and the environmental
effect caused by development activity. We evaluated the efficiency of economic
resources based on the following analyses: benefit-cost, net present value (NPV),and internal rate of return (IRR). Evaluating the investment feasibility of the best
construction shows that the public’s decision is the correct choice to support thegovernment’s decision. Public participation in economic development is one way
to achieve efficiency in economic resources.
The second research method uses a computable general equilibrium (CGE)model that adds environmental objectives to urban economic objectives in
Makassar City. After calibrating the model to Makassar’s economy and choosing
the reduction of CO2 emissions as the environmental objective, we can establish
efficient economic development. Accordingly, we can estimate how mucheconomic growth must be sacrificed for each environmental goal. It is also
possible to determine in which direction the mixed policy should be reformulatediii

to obtain combinations of efficient economic activity and minimal environmental
impact.
The model examines the impact of the carbon tax based on the 2006 input-output(I-O) table for Makassar City and estimates a social accounting matrix (SAM)
table for the same year. In CGE models, general equilibrium is achieved throughthe price mechanism. The model assumes a static economy with no time-related
elements. Twenty-eight industrial sectors and two production factors, labor andcapital are used in this study. A model economy contains a single representative
household that establishes its consumption to maximize its utility subject to its
budget constraint. The utility function used is the constant elasticity ofsubstitution (CES), in which the household maximizes utility subject to a budget
constraint. Every industry uses an intermediate input to produce one commodity
for each sector without a commodity by-product. Firms are assumed to maximize
their profits by managing inputs and outputs subject to their production
technology. Firms are assumed to be perfectly competitive and to have achievedequilibrium in 2006 through flexible price adjustments.
The carbon tax policy is assessed using two simulations. In the first simulation, acarbon tax is imposed on all industries without household transfer, and in thesecond simulation, the tax revenue is transferred to households. The governmenttransfers funds to households in an amount equal to its carbon tax revenue. Intheory, the implementation of a carbon tax will reduce CO2 emissions andincrease government revenues. Furthermore, household welfare will increase,
output prices will increase and households will reduce their consumption.

iv

The results of all simulations of the CGE model indicated that a carbon tax isable to reduce the volume of CO2 emissions by eight percent. In general, output
prices and production volumes declined. The demand for capital tended to be
fixed, and labor demand declined after tax revenues were transferred to therepresentative household. Household consumption declined following theimposition of carbon taxes but increased in response to the transfer of carbon tax
revenues. Therefore, household welfare increased after receiving transfers fromthe government.
It is crucial to effectively manage efforts to reduce CO2 emissions. Managing
emissions involves not only production-side efforts related to environmentallyfriendly technology but also prevention of a decline in commodity consumption
preferences.
This research describes two approaches to allocate resources efficiently and canbe used to choose policy that favors both the environment and human wellbeing
without sacrificing economic development.

v