General Equilibrium Benefit Transfers for Spatial Externalities: Revisiting EPA's Prospective Analysis

Environmental policy analyses increasingly require the evaluation of benefits from large changes in spatially differentiated public goods. Such changes are likely to induce general equilibrium effects through changes in household expenditures and local migration, yet current practice "transfers" constant marginal values for even the largest changes. Moreover, it ignores important distributional effects of policy. This paper demonstrates that recently developed locational equilibrium models can provide transferable general equilibrium benefit measures. Our results suggest that taking account of the potential for adjustment and household heterogeneity is important. Applying benefits estimated from this method to the effect of the Clean Air Act amendments in Los Angeles, we find that the estimated annual general equilibrium benefits in 2000 and 2010 are dramatically different by income group and location. The gains range from $33 to about $2,400 per household. These differences arise from variations in the air quality conditions, income, and the effects of general equilibrium price adjustment.