Estimating the General Equilibrium Benefits of Large Policy Changes: The Clean Air Act Revisited

51 Pages Posted: 20 Jul 2000 Last revised: 9 Apr 2014

See all articles by Holger Sieg

Holger Sieg

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

V. Kerry Smith

Arizona State University (ASU) - Economics Department; National Bureau of Economic Research (NBER)

H. Spencer Banzhaf

Georgia State University - Department of Economics; PERC - Property and Environment Research Center; National Bureau of Economic Research (NBER)

Randy Walsh

Duke University, Fuqua School of Business-Economics Group

Date Written: June 2000

Abstract

This paper reports the first comprehensive approach for measuring the general equilibrium willingness to pay for large changes in air quality. It is based on a well defined locational equilibrium model. The approach allows estimation of households' indirect utility function and the underlying distribution of household types. With these estimates it is possible to compute a new locational equilibrium and the resulting housing prices in response to exogenous changes in air quality. This permits construction of welfare measures which properly take into consideration the adjustments of households in equilibrium to non-marginal changes in air quality. These types of measures are outside the scope of more traditional approaches. The empirical approach of this paper provides, for the first time, an internally consistent framework for estimation and applied general equilibrium welfare analysis. We compute the general equilibrium willingness to pay for the changes in air quality between 1990 and 1995. We implement our empirical framework using data from Southern California, an area which has experienced dramatic improvements in air quality during the past 20 years. Our findings are by and large supportive for our approach and suggest that accounting for general equilibrium effects in applied welfare can be especially important.

Suggested Citation

Sieg, Holger and Smith, V. Kerry and Banzhaf, H. Spencer and Walsh, Randy, Estimating the General Equilibrium Benefits of Large Policy Changes: The Clean Air Act Revisited (June 2000). NBER Working Paper No. w7744. Available at SSRN: https://ssrn.com/abstract=233747

Holger Sieg (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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National Bureau of Economic Research (NBER)

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V. Kerry Smith

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
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National Bureau of Economic Research (NBER)

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H. Spencer Banzhaf

Georgia State University - Department of Economics ( email )

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PERC - Property and Environment Research Center

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National Bureau of Economic Research (NBER) ( email )

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Randy Walsh

Duke University, Fuqua School of Business-Economics Group

Box 90097
Durham, NC 27708-0097
United States

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