Economy-Wide Effects of Mortality Risk Reductions from Environmental Policies

The general equilibrium (GE) effects of environmental policies have long been a concern of stake-holders and researchers due to the potential for economy-wide feedbacks that could affect the efficiency and incidence of those policy interventions. Concerns about the potential economy-wide effects of environmental regulations are most often focused on the costs of compliance, while the beneficial outcomes of these policies are typically excluded from GE analyses. However, both regulators and researchers have recently shown interest in general equilibrium (GE) assessments of the benefits and economy-wide impacts of mortality risk reductions. GE models are able to capture feedbacks that may be important for understanding the welfare implications of environmental policies. In a study of the cumulative effects of the Clean Air Act, the U.S. Environmental Protection Agency found estimates for the benefits of air quality improvements that were more than an order of magnitude smaller under a GE approach com- pared with a traditional partial equilibrium (PE) approach. It has been suggested that these results are evidence that the PE benefits of environmental regulations are implausibly large. However, previous GE analyses of environmental or public health policies have characterized the expected health improvements using highly simplified approximations whose validity have yet to be closely examined. We present the first explicit characterization of mortality risk changes in a GE model applied to environmental regulations. We find that reductions in mortality risks can have significant GE feedbacks and that these effects are important for estimating the benefits, economic impacts, and potentially the costs of environmental policies. Our results suggest that the previously used approximations for incorporating mortality risk reductions in GE models may be the main source of the large discrepancies between GE and PE benefits estimates in previous studies, and may introduce significant errors into estimates of the economy-wide impacts of environmental policies.