Evaluating the Equilibrium Welfare Impacts of the 1990 Clean Air Act Amendments in the Los Angeles Area

Abstract

This dissertation develops a discrete choice equilibrium model to evaluate the benefits of the air quality improvements that occurred in the Los Angeles area following the 1990 Clean Air Act Amendments (CAAA). Large improvements in air quality will change the desirability of different neighborhoods, disrupting the equilibrium of the housing market. The discrete choice equilibrium approach accounts for the fact that air quality improvements brought about by the 1990 CAAA will change housing choices and prices. The dissertation makes two empirical contributions to public economics. First, the study provides the first application of the discrete choice equilibrium framework (Anas, 1982, Bayer et al., 2005) to the valuation of large environmental changes. Second, the study provides new evidence for the distributional benefits of the 1990 CAAA in the Los Angeles area. Households' location choices are modeled according to the random utility framework of McFadden (1978) and the differentiated product specification of Berry, Levinsohn and Pakes (1995). The model is estimated with public-use household microdata from the 1990 U.S. Census. Findings suggest that the air quality improvements that occurred in the Los Angeles area between 1990 and 2000 provided an average equilibrium welfare benefit of $1,800 to households. In contrast, average benefits are $1,400 when equilibrium price effects are not accounted, demonstrating that ignoring equilibrium effects will likely underestimate the benefits of large environmental changes. We find that the equilibrium welfare impacts of the 1990 CAAA in the Los Angeles area varied significantly across income groups. Households in the highest income quartile experienced equilibrium benefits of approximately $3,600 as compared to only $400 for households in the lowest income quartile. We also find that ignoring equilibrium adjustments in housing prices can significantly alter the distribution of relative welfare gains (i.e. welfare gains as a proportion of household income) across households. Indeed, welfare impacts that do not account for equilibrium adjustments suggest that high-income households experience larger relative welfare gains compared to low-income households. However, when accounting for equilibrium adjustments, we find that the distribution of relative welfare gains from the 1990 CAAA is fairly even across income groups.