General Equilibrium Benefit Estimates for Spatial Externalities: Projected Ozone Reductions for the Los Angeles Air Basin

V. Smith, Holger Sieg, Spencer Banzhaf and Randall Walsh

No 2003-08, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: This paper demonstrates how a new framework, using the necessary conditions for a locational equilibrium, offers the potential to transform this policy landscape. We demonstrate in this paper that the framework can be used as part of a benefit analysis of current environmental policy alternatives. We use our earlier estimates of household preferences derived within a locational equilibrium framework for the Los Angeles area. These findings are combined together with the spatially delineated, air quality projections developed by EPA for the evaluation of the 1990 Clean Air Act Amendments reported in EPA's first Prospective Analysis. Our approach is capable of accommodating the levels of detail generated for this policy assessment. It uses the same projected spatial variation in ozone concentrations in the computation of general equilibrium price effects as was developed for the agency's benefit analysis. Our findings indicate that the estimated annual general equilibrium benefits in 2000 and 2010 associated with the ozone improvements due to continuing the policies mandated under the 1990 Clean Air Act Amendments will be dramatically different by income group and location within the South Coast Air Quality Management District. The gains range from $33 to about $2,400 per household (in 1990 dollars). These differences arise from variations in air quality conditions, income, and the effects of general equilibrium price adjustment. To date, existing methods have been unable to measure consistently all of these effects together.

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