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Defensive Investments and the Demand for Air Quality: Evidence from the NOx Budget Program and Ozone Reductions

Author

Listed:
  • Deschenes, Olivier

    (University of California, Santa Barbara)

  • Greenstone, Michael

    (University of Chicago)

  • Shapiro, Joseph S.

    (Yale University)

Abstract

Demand for air quality depends on health impacts and defensive investments that improve health, but little research assesses the empirical importance of defenses. We study an important cap-and-trade market, which dramatically reduced NOx emissions, a key ingredient in ozone formation. A rich quasi-experiment reveals that it decreased summertime ozone, pharmaceutical expenditures, and mortality rates. Reductions in pharmaceutical purchases and mortality are each valued at $900 million annually, suggesting that defensive investments are a substantial portion of willingness-to-pay. We cautiously conclude that ozone reductions are the primary channel for these effects, implying that ozone's costs are larger than previously understood.

Suggested Citation

  • Deschenes, Olivier & Greenstone, Michael & Shapiro, Joseph S., 2013. "Defensive Investments and the Demand for Air Quality: Evidence from the NOx Budget Program and Ozone Reductions," IZA Discussion Papers 7557, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp7557
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    Keywords

    pharmaceuticals; ozone; cap and trade; willingness to pay for air quality; mortality; compensatory behavior; human health;
    All these keywords.

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods
    • I1 - Health, Education, and Welfare - - Health
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • D1 - Microeconomics - - Household Behavior

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