Answer the following questions.  Base your answers on the information in the article on the reading list,  "Air Pollution and Human Health” by Eugene Seskin and Lester Lave .   All your answers must be on this sheet.  Make sure you specify if the number you give is thousands, million, billions, etc.  

According to the authors, what society is willing to pay for improvements in air quality is commonly defined as the amount spent on medical care and the earnings foregone as a result of disease, disability, and/or death from poor air quality. But they also say that this is an underestimate of WTP. Why do they say that?



Fill in the table below using the reduction in health care costs in the article. Be sure to give the decrease in morbidity and mortality as a percentage, for a 50% reduction in air pollution.
Source of benefit (disease and % decrease in) Benefit in 1970 $ 1._________________ _ ____________ _________________ 2. ___________________ ____________ ____________________ 3. ___________________ ____________ __________________ 4. __________________ ____________ __________________ 5.__________________ ____________ __________________ Use the entries above for “all respiratory disease,” “cardiovascular disease,” and “all cancers,” to calculate the benefit from an increase in air quality, in 2005 $. To do this, we need to inflate the costs calculated by Lave and Seskin, since the medical services no longer needed when air quality improved were sold at much higher prices in 2005 than in 1970. This is how this would be done. If, say, the average price of medical services in 2005 is twice what it was in 1970 (it wasn’t so don’t assume it was) and $3 billion were spent on medical care in 1970, then in 2005 spending on those same services would have been twice that amount, i.e. $6 billion. In addition, population has increased. And so we have to adjust the numbers in Seskin and Lave for that. Say population tripled, the incidence of all diseases was the same, and the prices of medical services were constant. Then spending would have tripled ceteris paribus, i.e. just because population increased. Therefore, if the prices of medical services doubled and population tripled, spending would be six times what it was in 1970, i.e. $18 billion. So the four numbers you need to inflate the reduction in spending on medical care to account for a larger population and higher prices for medical care are: the values of a price index for medical care in 1970 and 2005, and U. S. population in 1970 and 2005. Get these numbers from the Economic Report of the President, 2013. They are in Appendix B, Tables B-34 and B-60. To check that you’re using the right data, population in 1980 was 227,726,000 and the price index for medical care that year was 74.9. (FYI, a price index shows you how the average price of something is changing over time.) Population: 1970 ______ vs. 2005 _________ Price index for medical care: 1970 _______ vs. 2005 _________ So then in 2005, savings on health care costs due to improved air quality would be 1. all respiratory disease: ___________________________ 2. for cardiovascular disease: ___________________________ 3. for all cancers: ___________________________ Show your work for respiratory disease: So, in 2005, our preliminary estimate of the benefit from improved air quality would be the sum of those amounts: _____________
We can use this number to estimate the social benefit from a 50% reduction in air pollution, roughly the decrease since 1970. Of course, to do this, we have to make an adjustment of the benefit, for the reasons you gave in answering question #2. But first let’s estimate the cost of the CAA. Go back to the following website: www.census.gov/prod/2008pubs/ma200-05.pdf and use the data there to figure the total cost of air pollution abatement to the manufacturing sector in 2005. Remember, total cost has two parts: operating costs and capital costs. And you only want these costs for abating air pollution. Add them.
to get total cost to manufacturing ____________ = operating cost __________ + capital cost ______________ Note that your total should be between 12 and 13 billion $.
Since this amount is only the amount spent by firms in the manufacturing sector, the cost that air pollution abatement imposes on society would be greater than this. Increase the cost you have for manufacturing to account for costs in other sectors. Base your adjustment on the following logic: if manufacturing accounts for 25% of GDP, then the cost of pollution abatement to manufacturing is 25% of the cost to the entire economy. So the cost economy-wide would be 4 times the cost to manufacturing. To inflate the cost to manufacturing to account for the cost of the legislation to all industries use GDP and GDP from the goods sector. Go to the Economic Report of the President, 2013 again. Go to Appendix B and get the numbers for GDP and Goods from Table B-8. To check, GDP in 1980 was $2788.1 billion and GDP from goods was $1035.2. Use GDP and GDP from Goods from this table to figure out what percent of the economy manufacturing is, and then what economy-wide spending on pollution abatement would be.
GDP 2005: ________________________ GDP from goods 2005: ________________________ Economy wide spending on pollution abatement is ________________ Show your work:
This is the social cost of pollution abatement. The social benefit is savings on health care due to improved air quality adjusted upward because of your answer to question #2. Let’s do that by placingGo to the table showing WTP estimates of the value of a statistical life (VSL) in the article by Landefeld and Seskin. Take the middle value for VSL from the surveys listed (there are 3) and the middle value for revealed preference labor market studies (there are 5). Take the average of these two amounts.
Those amounts are: $ __________ and $________________________. Their average is __________ This number is for 1977. If we inflate this because incomes and prices are higher in 2005 than in 1977, we get $4.6 million. Use that as the VSL.
OK, how many lives did the CAA save in 2005? Go to Table 115 in “Births, Deaths, Marriages & Divorces” in the 2009 edition of the Statistical Abstract of the United States (Google that….). Figure the number of people who, in 2005, died from
Malignant neoplasms ______ Diseases of the heart ______ Chronic lower respiratory disease _____ Note: ignore the numbers after a comma. For instance, the number of people who died from accidents in 2005 was 117,809. If you were asked to give that, you’d just write down 117. As a check, in 2005 34,136 people died from septicemia.
OK figure the number of lives that were saved in 2005 because of the CAA. To do this, go to Seskin and Lave and find the percentage decrease in mortality due to all cancers (malignant neoplasms), respiratory disease, and cardiovascular disease. For respiratory disease S & L give the % decrease in mortality and morbidity. So cut that percentage in half and use that for the percentage decrease in mortality from respir. disease. For example, if the percentage S & L give were 60%, you would use 30%. Now, here’s how to calculate the number of lives saved by the CAA, by illness. Take deaths in 2005 from each of these 3 illnesses and multiply each by the percentage decrease in death from that illness given by S & L. (Note that this is an underestimate of lives saved, i.e. more lives were saved than this.) So, the number of lives saved by the CAA due to less
Cancer = ________ Heart disease = ________ Respir. disease = ________ Total = ________ Using the number on the VSL I gave you, the benefit from lives saved = ______________________ Well then, on the basis of these calculations, what would you conclude about the social benefit and cost of the CAA, and the normative wisdom of passing that law?

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