Defensive Investments and the Demand for Air Quality: Evidence from the NOx Budget Program and Ozone Reductions
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)
University of Chicago - Department of Economics; Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)
Joseph S. Shapiro
Yale University, Department of Economics; National Bureau of Economic Research (NBER)
July 15, 2012
MIT Department of Economics Working Paper No. 12-18
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
Date posted: July 17, 2012 ; Last revised: February 21, 2014
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