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The Elasticity of Air Quality: Evidence from Millions of Households Across the United States

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  • Christos Makridis

    () (Stanford University)

Abstract

This paper estimates the elasticities of substitution between air quality and non-durables consumption, housing services, and leisure in the United States. First, I develop the most comprehensive database to date containing measures of household-level consumption, leisure, and demographics, together with county-level measures of weather, air quality, pollution, and economic development throughout the entire United States between 2005-2010. Second, I formulate and estimate a structural model allowing for nonseparable interactions between air quality and non-durables consumption, housing services, and leisure equal to 1.5, .62, and .32, respectively, and are identified from county-industry-specific deviations in air quality from the county averages after conditioning on shocks common to all counties within a state. Prior literature ignored the ways in which households are able to best respond to changes in environmental amenities through cross-substitution. The multi-dimensionality of the micro-data allows me to characterize heterogeneity in tastes for air quality based on brackets of educational attainment, income, age, and exposure to pollution. Third, applying my elasticity estimates to an analog of the EPA’s evaluation of the Clean Air Act Amendments of 1990, I find that the benefits are many orders of magnitude lower because households are able to substitute across different private goods and services.

Suggested Citation

  • Christos Makridis, 2015. "The Elasticity of Air Quality: Evidence from Millions of Households Across the United States," Discussion Papers 15-020, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:15-020
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    1. Shihe Fu & Stephen L. Ross, 2013. "Wage Premia in Employment Clusters: How Important Is Worker Heterogeneity?," Journal of Labor Economics, University of Chicago Press, vol. 31(2), pages 271-304.
    2. Dufour, Jean-Marie & Jasiak, Joann, 2001. "Finite Sample Limited Information Inference Methods for Structural Equations and Models with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 815-843, August.
    3. Steven Lehrer & Gregory Kordas, 2013. "Matching using semiparametric propensity scores," Empirical Economics, Springer, vol. 44(1), pages 13-45, February.
    4. Bengt Kristrom & Pere Riera, 1996. "Is the income elasticity of environmental improvements less than one?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 7(1), pages 45-55, January.
    5. repec:wyi:journl:002155 is not listed on IDEAS
    6. Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-647, June.
    7. Bayer, Patrick & Keohane, Nathaniel & Timmins, Christopher, 2009. "Migration and hedonic valuation: The case of air quality," Journal of Environmental Economics and Management, Elsevier, vol. 58(1), pages 1-14, July.
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