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

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 (NO x ) Budget Program (NBP), a cap-and-trade market, decreased NO x 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 $1.3 billion, respectively, suggesting that defenses are over one-third of willingness-to-pay for reductions in NO x emissions. Further, estimates indicate that the NBP's benefits easily exceed its costs and that NO x reductions have substantial benefits. (JEL I12, Q51, Q53, Q58)