Title

Defensive Investments and the Demand for Air Quality: Evidence from the NOx Budget Program

Document Type

Discussion Paper

Publication Date

4-1-2017

CFDP Number

2086

CFDP Pages

79

Journal of Economic Literature (JEL) Code(s)

H40, I10, Q40

Abstract

The demand for air quality depends on health impacts and defensive investments, but little research assesses the empirical importance of defenses. A rich quasi-experiment suggests that the Nitrogen Oxides (NOx) Budget Program (NBP), a cap-and-trade market, decreased NOx emissions, ambient ozone concentrations, pharmaceutical expenditures, and mortality rates. The annual reductions in pharmaceutical purchases, a key defensive investment, and mortality are valued at about $800 million and $1.1 billion, respectively, suggesting that defenses are over one-third of willingness-to-pay for reductions in NOx emissions. Further, estimates indicate that the NBP’s benefits easily exceed its costs and that NOx reductions have substantial benefits.

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