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Estimating the General Equilibrium Benefits of Large Policy Changes: The Clean Air Act Revisited

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  • Holger Sieg
  • V. Kerry Smith
  • H. Spencer Banzhaf
  • Randy Walsh

Abstract

This paper reports the first comprehensive approach for measuring the general equilibrium willingness to pay for large changes in air quality. It is based on a well defined locational equilibrium model. The approach allows estimation of households' indirect utility function and the underlying distribution of household types. With these estimates it is possible to compute a new locational equilibrium and the resulting housing prices in response to exogenous changes in air quality. This permits construction of welfare measures which properly take into consideration the adjustments of households in equilibrium to non-marginal changes in air quality. These types of measures are outside the scope of more traditional approaches. The empirical approach of this paper provides, for the first time, an internally consistent framework for estimation and applied general equilibrium welfare analysis. We compute the general equilibrium willingness to pay for the changes in air quality between 1990 and 1995. We implement our empirical framework using data from Southern California, an area which has experienced dramatic improvements in air quality during the past 20 years. Our findings are by and large supportive for our approach and suggest that accounting for general equilibrium effects in applied welfare can be especially important.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7744.

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Date of creation: Jun 2000
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Publication status: published as Sieg, Holger, V. Kerry Smith, H. Spencer Banzhaf and Randy Walsh. "Estimating The General Equilibrium Benefits Of Large Changes In Spatially Delineated Public Goods," International Economic Review, 2004, v45(4,Nov), 1047-1077.
Handle: RePEc:nbr:nberwo:7744

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  1. Timothy J. Bartik, 2008. "Measuring the Benefits of Amenity Improvements in Hedonic Price Models," Book chapters authored by Upjohn Institute researchers, in: Joseph Herriges & Catherine L. Kling (ed.), Revealed Preference Approaches to Environmental Valuation, volume 0, pages 53-64 W.E. Upjohn Institute for Employment Research.
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  5. Kenneth Y. Chay & Michael Greenstone, 1998. "Does Air Quality Matter? Evidence from the Housing Market," NBER Working Papers 6826, National Bureau of Economic Research, Inc.
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  15. Beron, Kurt & Murdoch, James & Thayer, Mark, 2001. "The Benefits of Visibility Improvement: New Evidence from the Los Angeles Metropolitan Area," The Journal of Real Estate Finance and Economics, Springer, vol. 22(2-3), pages 319-37, March-May.
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  18. Carliner, Geoffrey, 1973. "Income Elasticity of Housing Demand," The Review of Economics and Statistics, MIT Press, vol. 55(4), pages 528-32, November.
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Cited by:
  1. Wu, Xiaoyu & Cutter, Bowman, 2011. "Who votes for public environmental goods in California?: Evidence from a spatial analysis of voting for environmental ballot measures," Ecological Economics, Elsevier, vol. 70(3), pages 554-563, January.
  2. Currie, Janet & Neidell, Matthew, 2004. "Air Pollution and Infant Health: What Can We Learn From California's Recent Experience?," IZA Discussion Papers 1056, Institute for the Study of Labor (IZA).
  3. Kenneth Y. Chay & Michael Greenstone, 1998. "Does Air Quality Matter? Evidence from the Housing Market," NBER Working Papers 6826, National Bureau of Economic Research, Inc.

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