External Working Paper

Residential Sorting and the Incidence of Local Public Goods: Theory and Evidence from Air Pollution

Oct 1, 2016 | Daniel M. Sullivan

Abstract

While the costs of environmental policies are generally thought to be regressive, the distribution of benefits is less understood. This paper estimates the change in rents and neighborhood demographics in metropolitan Los Angeles caused by the California Electricity Crisis of 2000 which unexpectedly and permanently lowered air pollution in certain neighborhoods. I measure local exposure to this pollution shock using a dispersion model developed by atmospheric scientists which tracks the effects individual firms have on the air quality at arbitrary locations. The estimates show that (a) housing rents increase as much as housing prices; (b) 9% of low-income households leave the sample area due to improved air quality; and (c) low-income households are rarely home owners who would benefit from increased housing wealth. I show that a standard residential sorting model predicts that when low-income residents respond to improved amenities by leaving, the distribution of benefits from the improvement is likely regressive. Together, these results suggest that the distribution of benefits from improved air quality likely favors higher-income households.