Defensive investments and the demand for air quality : evidence from the NOx budget program and ozone reductions

The demand for air quality depends on health impacts and defensive investments that improvehealth, but little research assesses the empirical importance of defenses. We study the NOxBudget Program (NBP), an important cap-and-trade market for nitrogen oxides (NOx) emissions,a key ingredient in ozone air pollution. A rich quasi-experiment suggests that the NBP decreasedNOx emissions, ambient ozone concentrations, pharmaceutical expenditures, and mortality rates.Reductions in pharmaceutical purchases and mortality are valued at about $800 million and $1.5billion annually, respectively, in a region covering 19 Eastern and Midwestern United States;these findings suggest that defensive investments account for more than one-third of thewillingness-to-pay for reductions in NOx emissions. Further, the NBP's estimated benefits easilyexceed its costs and instrumental variable estimates indicate that the estimated benefits of NOx reductions are substantial