Academic journal article AEI Paper & Studies

How Much Do We Care about the Air? Evidence on the Value of Air Quality Improvements

Academic journal article AEI Paper & Studies

How Much Do We Care about the Air? Evidence on the Value of Air Quality Improvements

Article excerpt

I. Introduction

Perhaps the most important impact of air quality policies on households occurs when residents' well-being is improved following the improvement in air quality. This relationship almost sounds too simplistic to merit deep inquiry, but the positive impact of air quality policies on quality of life depends on two conditions that are ultimately empirical questions. First, the policies must actually improve air quality. Second, the improvements must be something that people value or that improve their well-being. Either or both conditions may fail to hold, in principal. This essay examines the latter question of how beneficial air quality improvements are. (For a discussion of the former, readers are referred to Greenstone 2004 and Auffhammer et al. 2009.)

Better understanding how these factors influence the benefits of air quality improvements is vital to future air quality policy. The findings presented here can inform an efficient and optimal air quality policy that weighs the benefits of further improvements against its costs. As the current Administration moves to tighten federal air quality standards further, answers to the questions raised here take on additional importance. Perhaps tightening standards merely reflect a time trend in environmental values. There may be a public good component in making these improvements, where the benefit to the whole of society exceeds the sum of each individual's own private benefit. That benefits rise with prosperity has major implications for policymaking during the recent, deep recession as well as the long run. And, perhaps most importantly, the possibility that benefits of further improvements fade as our air gets cleaner and cleaner can be critical to any efficient policy.

The impact of air quality improvements on individuals' well-being has been the subject of inquiry by many scholars over the past several decades. The evidence points to consistently positive welfare effects from air quality improvements, although the estimated magnitude of such values exhibits considerable variation. This report reviews this evidence and offers some explanations for the observed variation. A few hypotheses about the determinants of air quality values figure prominently in discussions about the design and reform of air quality policies. The result shed some light on:

* the role of income (do the benefits rise with income?)

* diminishing returns to improvements (does the willingness-to-pay for additional improvements decline when the starting point is cleaner?)

* changing tastes (is there a time-trend in values?)

* private vs. public values (are values for improving everyone's air significantly greater than values for improving just one's own air?)

* publication bias (do peer-reviewed studies tend to produce different results?)

Of course, much of the variation in results can also be explained by alternative measurement methods employed in the literature. After reviewing the theoretical and methodological basis for this literature (Section II), a large collection of studies from the empirical literature are reviewed (Section III) and a meta-analysis tests a series of policy-relevant hypotheses (Section IV). A final section briefly discusses the implications for policy as well.

II. Non-market Valuation Theory

A key concept in environmental economics is nonmarket valuation. It is often difficult to directly assess the value that individuals or a community place on an environmental good, like air quality, because there are no markets for these goods. (By comparison, the value of haircuts is much easier to measure by conducting a survey of prices for those haircuts.) Lacking markets for many environmental goods, economists must utilize other methods to ascertain the value of non-market goods to individuals or a community.

The literature employing nonmarket valuation techniques for environmental issues is both well-established and continuing to develop. …

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