In the last 30 to 40 years, an increasing awareness of the link between urban air pollutant levels and negative health effects have led to numerous studies and policies that are targeted towards both understanding the linkage and mitigating its effects. In 1970, the Environmental Protection Agency (EPA) created the Clean Air Act directed at reducing harmful emissions that cause high pollution levels in urban areas. Ever since then, environmental economists and policy makers have attempted to better understand the economic impacts of these regulations through cost and benefit analysis.

Towards that end, we have developed a methodology for fully integrating the health effects from exposure to air pollution into a computable general equilibrium economic model. This model represents the first attempt at fully incorporating the economic valuation of air pollution in an integrated economic model that has endogenously built-in consumer demand and preference curves to accurately represent the demand for air pollution health. This framework provides a way to consistently value effects with commonly used approaches for valuing costs of mitigation and to explore uncertainties in these estimates. Furthermore, we also describe a new stock and flow model to track the extra mortalities from chronic exposure to particulate matters. Past frameworks have assumed an immediate relationship between pollution levels and mortality levels. While this is true for mortality due to acute exposure, changes in mortalities from chronic exposure due to a change in pollution levels are only gradually realized and so the full effects on the economy are observed for many years. This new framework allows the tracking of total pollution in-take and its effect on mortality levels over time as pollution levels change.

Using these new models, we valued the economic benefit of reduced air pollution due to the Clean Air Act regulations to be over $7 trillion from 1970 to 2000, or 2.1% of aggregate US economic welfare over the period. This does not include the benefits into the future (after 2000) from reduction in mortality due chronic exposure during these years. The economic benefit of those saved mortalities is another $7 trillion using a 3% discount rate. Another calculation is the remaining economic burden of unmitigated pollution levels (actual historical pollution). We estimate this to be approximately $9 trillion over the same period. The $9 trillion burden includes the early mortalities due to chronic exposure to PM before and during this period.

While these economic benefits of air pollution regulation are large ($7 trillion), they are considerably less than the $27.6 trillion estimated in EPAs own analysis of the benefits of air pollution regulation. The main difference for our lower estimate is the stock-flow accounting of mortality due to chronic exposure. There are considerable uncertainties in these estimates both because of uncertainties in the relationship between air pollution exposure and the health effects, and in the assumptions needed to value these effects.