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Does Air Quality Matter? Evidence from the Housing Market


Kenneth Y. Chay


University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Michael Greenstone


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

February 2004

MIT Department of Economics Working Paper No. 04-19

Abstract:     
We exploit the structure of the Clean Air Act to provide new evidence on the capitalization of total suspended particulates (TSPs) air pollution into housing values. This legislation imposes strict regulations on polluters in nonattainment counties, which are defined by TSPs concentrations that exceed a federally set ceiling. TSPs nonattainment status is associated with large reductions in TSPs pollution and increases in county-level housing prices. When nonattainment status is used as an instrumental variable for TSPs, we find that the elasticity of housing values with respect to particulates concentrations range from -0.20 to -0.35. These estimates of the average marginal willingness-to-pay for clean air are far less sensitive to model specification than cross-sectional and fixed effects estimates, which occasionally have the perverse sign. We also find modest evidence that the marginal benefit of pollution reductions is lower in communities with relatively high pollution levels, which is consistent with preference-based sorting. Overall, the improvements in air quality induced by the mid-1970s TSPs nonattainment designation are associated with a $45 billion aggregate increase in housing values in nonattainment counties between 1970 and 1980.

Number of Pages in PDF File: 59

Keywords: Benefits of clean air act, valuation of air quality, hedonic methods

JEL Classification: H4, Q51, Q53, Q58

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Date posted: May 17, 2004  

Suggested Citation

Chay, Kenneth Y. and Greenstone, Michael, Does Air Quality Matter? Evidence from the Housing Market (February 2004). MIT Department of Economics Working Paper No. 04-19. Available at SSRN: http://ssrn.com/abstract=544182 or http://dx.doi.org/10.2139/ssrn.544182

Contact Information

Kenneth Y. Chay
University of California, Berkeley - Department of Economics ( email )
549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-8596 (Phone)
510-642-0638 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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
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