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The Elasticity of Air Quality: Evidence from Millions of Households Across the United States

Jun 2015
Working Paper
15-020
By  Christos Makridis
This paper estimates the elasticities of substitution between air quality and non-durables consumption, housing services, and leisure in the United States. First, I develop the most comprehensive database to date containing measures of household-level consumption, leisure, and demographics, together with county-level measures of weather, air quality, pollution, and economic development throughout the entire United States between 2005-2010. Second, I formulate and estimate a structural model allowing for nonseparable interactions between air quality and non-durables consumption, housing services, and leisure equal to 1.5, .62, and .32, respectively, and are identified from county-industry-specific deviations in air quality from the county averages after conditioning on shocks common to all counties within a state. Prior literature ignored the ways in which households are able to best respond to changes in environmental amenities through cross-substitution. The multi-dimensionality of the micro-data allows me to characterize heterogeneity in tastes for air quality based on brackets of educational attainment, income, age, and exposure to pollution. Third, applying my elasticity estimates to an analog of the EPA’s evaluation of the Clean Air Act Amendments of 1990, I find that the benefits are many orders of magnitude lower because households are able to substitute across different private goods and services.