Economy-Wide Effects of Mortality Risk Reductions from Environmental Policies

Economy-wide feedbacks can affect the efficiency and incidence of policy interventions, and have long been of interest to stake-holders and researchers. When concerns are raised about the general equilibrium (GE) effects of environmental regulations it is most often with respect to the costs of compliance. However, both regulators and researchers have recently shown interest in the potential economy-wide effects of health improvements, including mortality risk reductions. In a study of the cumulative effects of the Clean Air Act, the U.S. Environmental Protection Agency found the benefits of air quality improvements were more than an order of magnitude smaller when estimated with a GE approach compared with a traditional partial equilibrium (PE) approach. It has been suggested that these results are evidence that the PE benefits of environmental regulations are implausibly large. However, previous GE analyses of environmental policies have characterized the expected health improvements using highly simplified approximations whose validity have yet to be closely examined. We present the first explicit characterization of mortality risk changes in a GE model applied to environmental regulations. We find that reductions in mortality risks can have significant GE feedbacks and that these effects are important for estimating the benefits, economic impacts, and potentially the costs of environmental policies. However, our results also suggest that critical methodological limitations led to biased results in previous studies and that the PE estimates of mortality risk reductions are not necessarily implausibly large.