The (Non)Separability of Air Quality: Evidence from Millions of Households Across the United States

Abstract

The costs and benefits of environmental policy depend crucially on the assumed micro-elasticities between market and non-market goods. In their absence, general equilibrium models have assumed environmental amenities are perfect substitutes with market goods, such as consumption and leisure. The first part of the paper compiles the most comprehensive micro-data to date between 1980 and 2014 containing individual and county outcomes from the Census Bureau and Environmental Protection Agency. Using the Consumption Expenditure Survey, I create individual-level predictions of consumption expenditures in the census micro-data. With the newly created data, I document a strong negative association between ozone pollution and both consumption and leisure at the county-level. The second part of the paper develops a partial equilibrium sorting model with non-separable preferences between each of the market goods (consumption, leisure, and housing) and pollution. The third part of the paper uses the equilibrium conditions implied by the model to estimate the elasticities between each of the market and non-market goods. The fourth part of the paper uses the estimated elasticities to revisit the welfare gains of the Clean Air Act Amendments (CAAA) in the presence of non-separabilities. Preliminary results indicate that initial estimates of the welfare gains are drastically overstated.

Keywords: elasticity of air quality; hedonic prices; non-separability; willingness to pay

JEL Classification: J23, Q51, Q53, Q5