Does Air Quality Matter? Evidence from the Housing Market

59 Pages Posted: 17 May 2004  

Kenneth Y. Chay

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

Michael Greenstone

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

Multiple version iconThere are 3 versions of this paper

Date Written: February 2004

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.

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

JEL Classification: H4, Q51, Q53, Q58

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: https://ssrn.com/abstract=544182 or http://dx.doi.org/10.2139/ssrn.544182

Kenneth Y. Chay

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Michael Greenstone (Contact Author)

University of Chicago - Department of Economics ( email )

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United States

National Bureau of Economic Research (NBER)

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