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http://ssrn.com/abstract=2109861
 
 

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


Olivier Deschenes


University of California, Santa Barbara - College of Letters & Science - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)

Michael Greenstone


Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Joseph S. Shapiro


Yale University, Department of Economics

July 15, 2012

MIT Department of Economics Working Paper No. 12-18

Abstract:     
Willingness to pay for air quality is a function of health and the costly defensive investments that contribute to health, but there is little research assessing the empirical importance of defensive investments. The setting for this paper is a large U.S. emissions cap and trade market - the NOx Budget Trading Program (NBP) - that has greatly reduced NOx emissions since its initiation in 2003. Using rich quasi-experimental variation, we find that the reductions in NOx emissions decreased the number of summer days with high ozone levels by about 25%. The NBP also led to reductions in expenditures on prescription pharmaceutical expenditures of about 1.9%. Additionally, the summer mortality rate declined by approximately 0.5%, indicating that there were about 2,200 fewer premature deaths per summer, mainly among individuals 75 and older. The monetized value of the reductions in pharmaceutical purchases and mortality rates are each roughly $900 million annually, suggesting that defensive investments are a significant portion of willingness to pay for air quality. Finally, we cautiously conclude that the reductions in ozone are the primary channel for these reductions in defensive investments and mortality rates, which indicates that willingness to pay for ozone reductions is larger than previously understood.

Number of Pages in PDF File: 61

Keywords: willingness to pay for air quality, cap and trade, ozone, pharmaceuticals, mortality, compensatory behavior, human health

JEL Classification: H4, I1, Q4, D1

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Date posted: July 17, 2012 ; Last revised: February 21, 2014

Suggested Citation

Deschenes, Olivier and Greenstone, Michael and Shapiro, Joseph S., Defensive Investments and the Demand for Air Quality: Evidence from the NOx Budget Program and Ozone Reductions (July 15, 2012). MIT Department of Economics Working Paper No. 12-18. Available at SSRN: http://ssrn.com/abstract=2109861 or http://dx.doi.org/10.2139/ssrn.2109861

Contact Information

Olivier Deschenes
University of California, Santa Barbara - College of Letters & Science - Department of Economics ( email )
Santa Barbara, CA 93106
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA) ( email )
P.O. Box 7240
Bonn, D-53072
Germany
Michael Greenstone (Contact Author)
Massachusetts Institute of Technology (MIT) - Department of Economics ( email )
50 Memorial Drive
E52-391
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Joseph S. Shapiro
Yale University, Department of Economics ( email )
37 Hillhouse Ave, Room 34
New Haven, CT 06510
United States
203-432-5075 (Phone)
203-432-6323 (Fax)
HOME PAGE: http://economics.yale.edu/people/joseph-s-shapiro
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