Economic Geography and the Efficiency of Environmental Regulation
We develop a spatial equilibrium model to evaluate the efficiency and distributional impacts of the leading air quality regulation in the United States: the National Ambient Air Quality Standards (NAAQS). We link our economic model to an integrated assessment model for air pollutants which allows us to capture endogenous changes in emissions, amenities, labor, and production. Our results show that the NAAQS generate over $23 billion of annual welfare gains. This is roughly 80 percent of welfare gains of the second-best NAAQS design, but only 25 percent of the first-best emission pricing policy. The NAAQS benefits are concentrated in a small set of cities, impose substantial costs on manufacturing workers, improve amenities in counties in compliance with the NAAQS, and reduce emissions in compliance counties through general equilibrium channels. These findings highlight the importance of accounting for geographic reallocation and equilibrium responses when quantifying the effects of environmental regulation.
We thank Dana Andersen for providing the historical nonattainment data. We thank Todd Gerarden, Raymond Guiteras, Jon Hughes, Dan Kaffine, Cathy Kling, Ashley Langer, Derek Lemoine, Chris Timmins, Eric Zou, and seminar participants at Cornell University, Oregon State University, the Triangle Resource and Environmental Economics Seminar, the University of Arizona and University of Colorado, Boulder for valuable feedback. All remaining errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.