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

68 Pages Posted: 31 Aug 2013

See all articles by Olivier Deschenes

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; Becker Friedman Institute for Economics; National Bureau of Economic Research (NBER)

Joseph S. Shapiro

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

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Abstract

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 an important cap-and-trade market, which dramatically reduced NOx emissions, a key ingredient in ozone formation. A rich quasi-experiment reveals that it decreased summertime ozone, pharmaceutical expenditures, and mortality rates. Reductions in pharmaceutical purchases and mortality are each valued at $900 million annually, suggesting that defensive investments are a substantial portion of willingness-to-pay. We cautiously conclude that ozone reductions are the primary channel for these effects, implying that ozone's costs are larger than previously understood.

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

JEL Classification: H4, I1, Q4, Q5, 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 and Ozone Reductions. IZA Discussion Paper No. 7557. Available at SSRN: https://ssrn.com/abstract=2318738

Olivier Deschenes (Contact Author)

University of California, Santa Barbara - College of Letters & Science - Department of Economics ( email )

UC Santa Barbara
Santa Barbara, CA 93106
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
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IZA Institute of Labor Economics ( email )

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Bonn, D-53072
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Michael Greenstone

University of Chicago - Department of Economics

1126 East 59th Street
Chicago, IL 60637
United States

Becker Friedman Institute for Economics ( email )

Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joseph S. Shapiro

University of California, Berkeley ( email )

HOME PAGE: http://joseph-s-shapiro.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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