Refer to the image Ch. 18, Example 18.7 - 'The Demand for Clean Air'Why is clean air a public good? What does Fig. 18.16 (image provided) show about the willingness to pay for clean air? Figure 18.16 The Demand for Clean AirWillingnessto Pay300025002000High IncomeMiddle Income1500Low Income1000500012 3 1 567910Nitrogen oxide (pphm)The three curves describe the willingness to pay for clean air (a reduction in the level of nitrogenoxides) for each of three different households (low income, middle income, and high income). Ingeneral, higher-income households have greater demands for clean air than lower-incomehouseholds. Moreover, each household is less willing to pay for clean air as the level of air qualityincreases.The demand curves are upward-sloping because we are measuring pollution ratherthan clean air on the horizontal axis. As we would expect, the cleaner the air, the lowerthe willingness to pay for more of the good. These differences in the willingness to payfor clean air vary substantially. In Boston, for example, nitrogen oxide levels rangedfrom 3 to 9 pphm. A middle-income household would be willing to pay $800 for a 1pphm reduction in nitrogen oxide levels when the level is 3 pphm, but the figure wouldjump to $2200 for a 1 pphm reduction when the level is 9 pphm.Note that higher-income households are willing to pay more than lower-incomehouseholds to obtain a small improvement in air quality. At low nitrogen oxide levels (3pphm), the differential between low- and middle-income households is only $200, but itincreases to about $700 at high levels (9 pphm).With quantitative information about the demand for clean air and separate estimates ofthe costs of improving air quality, we can determine whether the benefits ofenvironmental regulations outweigh the costs. A study by the National Academy ofSciences of regulations on automobile emissions did just this. The study found thatcontrols would lower the level of pollutants, such as nitrogen oxides, by approximately10 percent. The benefit of this 10-percent improvement to all residents of the UnitedStates was calculated to be approximately $2 billion. The study also estimated that itwould cost somewhat less than $2 billion to install pollution control equipment inautomobiles to meet emissions standards. The study concluded, therefore, that thebenefits of the regulations did outweigh the costs.a Example 18.7The Demand for Clean AirIn Example 4.6 we used the demand curve for clean air to calculate the benefits of acleaner environment. Now let's examine the public-good characteristics of clean air.Many factors, including the weather, driving patterns, and industrial emissions,determine a region's air quality. Any effort to clean up the air will generally improve airquality throughout the region. As a result, clean air is nonexclusive: It is difficult to stopany one person from enjoying it. Clean air is also nonrival: My enjoyment does notinhibit yours.Because clean air is a public good, there is no market and no observable price at whichpeople are willing to trade clean air for other commodities. Fortunately, we can inferpeople's willingness to pay for clean air from the housing market-households will paymore for a home located in an area with good air quality than for an otherwise identicalhome in an area with poor air quality.Let's look at the estimates of the demand for clean air obtained from a statisticalanalysis of housing data for the Boston metropolitan area. 25 The analysis correlateshousing prices with the quality of air and other characteristics of the houses and theirneighborhoods. Figure 18.16 shows three demand curves in which the value put onclean air depends on the level of nitrogen oxides and on income. The horizontal axismeasures the level of air pollution in terms of parts per hundred million (pphm) ofnitrogen oxide in the air. The vertical axis measures each household's willingness to payfor a one-part-per-hundred-million reduction in the nitrogen oxide level.

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Why is clean air a public good? What does Fig. 18.16 (image provided) show about the willingness to pay for clean air?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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