Estimating the General Equilibrium Benefits of Large Changes in Spatially Delineated Public Goods

The purpose of this paper is to report a new approach for measuring the general equilibrium willingness to pay for large changes in spatially delineated public goods such as air quality. We estimate the parameters of a locational equilibrium model and compute equilibria for alternative scenarios characterizing the availability of public goods within a system of communities. We construct welfare measures which take into consideration the adjustments of households in equilibrium to non-marginal changes in public goods. We apply this framework to analyze willingness to pay for reductions in ozone concentrations in Southern California between 1990 and 1995. The results suggest that partial equilibrium welfare gains can be offset by housing price increases in communities which experience the largest improvements in air quality. Similarly, prices can decrease in communities with small improvements in public good provision. An analysis which ignores households' relocations in response to large changes in public good provision and the resulting price adjustments is therefore likely to yield biased estimates of the distribution of welfare gains.