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

74 Pages Posted: 17 Jul 2012 Last revised: 7 Jun 2016

Olivier Deschenes

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

Michael Greenstone

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Joseph S. Shapiro

Yale University, Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Multiple version iconThere are 4 versions of this paper

Date Written: June 1, 2016

Abstract

The demand for air quality depends on health impacts and defensive investments that improve
health, but little research assesses the empirical importance of defenses. We study the NOx
Budget Program (NBP), an important cap-and-trade market for nitrogen oxides (NOx) emissions,
a key ingredient in ozone air pollution. A rich quasi-experiment suggests that the NBP decreased
NOx emissions, ambient ozone concentrations, pharmaceutical expenditures, and mortality rates.
Reductions in pharmaceutical purchases and mortality are valued at about $800 million and $1.5
billion annually, respectively, in a region covering 19 Eastern and Midwestern United States;
these findings suggest that defensive investments account for more than one-third of the
willingness-to-pay for reductions in NOx emissions. Further, the NBP’s estimated benefits easily
exceed its costs and instrumental variable estimates indicate that the estimated benefits of NOx reductions are substantial.

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

JEL Classification: H4, I1, Q4, D1

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 (June 1, 2016). Available at SSRN: https://ssrn.com/abstract=2109861 or http://dx.doi.org/10.2139/ssrn.2109861

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

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Michael Greenstone (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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