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

This study develops a discrete choice locational 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). 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 study provides the first application of the discrete choice equilibrium framework (Anas, 1980, Bayer et al., 2005) to the valuation of large environmental changes. The study also provides new evidence for the distributional welfare impacts of the 1990 CAAA in the Los Angeles area. Households’ location choices are modeled according to the random utility framework of McFadden (1973) and the differentiated product specification of Berry, Levinsohn and Pakes (1995). 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. In addition, we find that the equilibrium welfare impacts of the 1990 CAAA in the Los Angeles area varied significantly across income groups.