Partial equilibrium model The terms of reference for this inquiry ask the Productivity Commission to examine the scope to use alternative methods for determining Australia’s migrant intake including a specific scenario in which entry charges would be the primary basis for selection of migrants, subject to migrants meeting health, character and security requirements. The Commission has developed a partial equilibrium to help explore the impacts of alternative methods to determine Australia’s migrant intake, relative to the current system where the intake of migrants is determined primarily by a mix of qualitative criteria, quotas and imposts and where price is not the principal means to allocate visas. A preliminary version of the model was used for the draft report. Substantial improvements have been made to the model since the draft report, reflecting feedback received in two workshops (a technical workshop in December 2015 and a policy workshop in February 2016), in submissions and from a referee report. This model has been used to explore how the composition of Australia’s permanent migrant intake might change under visa charging scenarios. It also provides illustrative estimates of the potential fiscal impacts. This model is used to complement the qualitative analysis of alternative immigration policies elsewhere in the report. This technical supplement explains the key features of the partial equilibrium model, namely: background to the model (section C.1) modelling framework (section C.2) parameterising the (section C.3) fiscal impacts (section C.4) policy scenarios and results (section C.5). C.1 Background to the model A partial equilibrium approach When evaluating the impacts of pricing/charging scenarios on Australia’s permanent migration intake, issues that need to be considered include:
In each market, Australian are allocated to potential migrants with the highest net benefits, subject to quotas. The modelling framework abstracts from the particular mechanism used to allocate visas, such as an auction. Illustrative mechanisms in the model In the modelling framework, potential migrants choose to migrate when willingness to pay exceeds their marginal cost of migrating (expected benefits outweigh their expected costs) subject to a quota. Australia’s Migration Programme is currently set at 190 000 per year, but it also includes limits on specific types of visas. Some limits are binding — in that there is excess demand for some visas — while some are not. These limits are represented as quotas in the model. Figure C.3 illustrates an example of a binding and a nonbinding quota. In this example, there are two visas, for migrants of types A and B, and quotas of 100 for each type. The quota for type A migrants is binding since willingness to pay exceeds migration costs beyond the 100th migrant. The quota for type B migrants is nonbinding since migration costs exceed willingness to pay from the 50th migrant. The can be used to represent the effects of maintaining or relaxing specific or overall quotas. If specific quotas are removed but overall quotas are maintained, visas are reallocated to potential migrants with a higher net benefit from migrating. For example, if initial quotas of 100 for types A and B migrants were replaced with an overall quota of 200 then visas would be reallocated from type B to type A migrants since type A migrants tend to have a higher willingness to pay at each quota (figure C.4). The net benefit of migrating (willingness to pay less migration costs) equalises across both visa markets. Immigration charges can be represented in the model in two equivalent ways. A charge can be set (figure C.5, panel a) and will reduce the number of migrants. Alternatively a quota can be set where visas are allocated to potential migrants with the highest net benefit. If the quota binds (there is excess demand) an endogenous charge will result (figure C.5, panel b). In the illustration in figure C.5, the endogenous charge is the same as the set charge with both methods of charging. In practice, the marketdetermined price will be uncertain if a quota is set, while the number of applicants will be uncertain if a charge is set. Figure C.3 Binding and nonbinding quotas