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Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

University of Washington

“Valuing public goods using happiness data:
The case of air quality”
by Arik Levinson
Journal of Public Economics

Jorge Rojas-Vallejos

2015

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

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Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Content

1

Introduction

2

Happiness in economics

3

Data end Methodology

4

Results

5

Conclusions

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

2 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Introduction
Remark
Estimate the willingness to pay for a local public good, air quality.
Time varies — Location remains fixed

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

3 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Introduction
Remark
Estimate the willingness to pay for a local public good, air quality.
Time varies — Location remains fixed
Traditional methods of estimation:
1

Travel-cost models

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

3 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Introduction
Remark
Estimate the willingness to pay for a local public good, air quality.
Time varies — Location remains fixed
Traditional methods of estimation:
1

Travel-cost models

2

Hedonic regressions

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

3 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Introduction
Remark
Estimate the willingness to pay for a local public good, air quality.
Time varies — Location remains fixed
Traditional methods of estimation:
1

Travel-cost models

2

Hedonic regressions

3

Contingent valuation surveys

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

3 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Introduction
Remark
Estimate the willingness to pay for a local public good, air quality.
Time varies — Location remains fixed
Traditional methods of estimation:
1

Travel-cost models

2

Hedonic regressions

3

Contingent valuation surveys

Here, Levinson uses “Happiness” or subjective well-being to estimate WTP.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

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Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Introduction
The goal of this study is to obtain the average marginal rate of
substitution between income and air quality AMRSYQ . Levinson
calls this term for shortness WTP. Strictly speaking, he estimates:

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

4 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Introduction
The goal of this study is to obtain the average marginal rate of
substitution between income and air quality AMRSYQ . Levinson
calls this term for shortness WTP. Strictly speaking, he estimates:
The trade-off between income and air quality that will leave people,
on average, equally happy.

Income

2

1

0
0

1

2

Quality
Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

4 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Introduction
The goal of this study is to obtain the average marginal rate of
substitution between income and air quality AMRSYQ . Levinson
calls this term for shortness WTP. Strictly speaking, he estimates:
The trade-off between income and air quality that will leave people,
on average, equally happy.

Income

2

1

0
0

1

2

Quality
Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

4 / 28

Index

Introduction

Happiness in economics

Data

Variables

Happiness

Methodology

Results

Conclusions

Index

Introduction

Happiness in economics

Data

Variables

Happiness

Air Quality

Methodology

Results

Conclusions

Index

Introduction

Happiness in economics

Data

Methodology

Variables

Happiness

Air Quality

Weather

Results

Conclusions

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Variables

Happiness

Air Quality

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

Weather

2015

5 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Variables

Happiness

Air Quality

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

Weather

2015

5 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Variables

Happiness

Air Quality

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

Weather

2015

5 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Variables

Happiness

Air Quality

Weather

The impact of leaving out some of these variables is OVB.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

5 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics

Paradox
Richard Easterlin (1975) stated that happiness does not increase
with income across countries or within a country over time, but it
does increase with income across individuals within a country at
any given point in time.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

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Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics

Paradox
Richard Easterlin (1975) stated that happiness does not increase
with income across countries or within a country over time, but it
does increase with income across individuals within a country at
any given point in time.

The evidence is mixed about this! However, there are more evidence
supporting the paradox.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

6 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics

Suppose the paradox is true, then there are two possible explanations:
1

People become habituated to their situations and change their
reference level of well-being,

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

7 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics

Suppose the paradox is true, then there are two possible explanations:
1

People become habituated to their situations and change their
reference level of well-being,

2

Happiness depends on relative income.
Richest guy in poorest town may be happier than poorest guy
in richest town.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

7 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics

Why do we care about this paradox?

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

8 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics

Why do we care about this paradox?

The key feature of this analysis identifies the relationship between
happiness and the place-specific, date-specific air quality, at the place
and date where the happiness question was asked.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

8 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics

Why do we care about this paradox?

The key feature of this analysis identifies the relationship between
happiness and the place-specific, date-specific air quality, at the place
and date where the happiness question was asked.
The author compares stated happiness by statistically similar respondents, at the same locale, during the same season of the same
year, who just happen to have been surveyed on days when the air
quality differed (Relative exposition to pollution).

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

8 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics
There are a few examples of applications of these happiness measures:
I Airport noise
I Flood disasters
I Terrorism
I Weather & climate

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

9 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics
There are a few examples of applications of these happiness measures:
I Airport noise
I Flood disasters
I Terrorism
I Weather & climate
The problem...

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

9 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics
There are a few examples of applications of these happiness measures:
I Airport noise
I Flood disasters
I Terrorism
I Weather & climate
The problem... they use annual average measures of the public
good...

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

9 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics
There are a few examples of applications of these happiness measures:
I Airport noise
I Flood disasters
I Terrorism
I Weather & climate
The problem... they use annual average measures of the public
good... this may induce bias...

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

9 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics
There are a few examples of applications of these happiness measures:
I Airport noise
I Flood disasters
I Terrorism
I Weather & climate
The problem... they use annual average measures of the public
good... this may induce bias... due to heterogeneity

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

9 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Happiness in Economics
There are a few examples of applications of these happiness measures:
I Airport noise
I Flood disasters
I Terrorism
I Weather & climate
The problem... they use annual average measures of the public
good... this may induce bias... due to heterogeneity

Remark
Aggregating environmental quality across entire countries masks
much of its heterogeneity!

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

9 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Advantages of this approach
1

Travel-cost and hedonic models may underestimate the value
of air quality. Why?

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

10 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Advantages of this approach
1

Travel-cost and hedonic models may underestimate the value
of air quality. Why? 
Travel-cost assumes that only people affected have value for
clean air. 
Hedonic methods can capture this, but it may accrue value to
people who really do not care even though they are affected.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

10 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Advantages of this approach
1

Travel-cost and hedonic models may underestimate the value
of air quality. Why? 
Travel-cost assumes that only people affected have value for
clean air. 
Hedonic methods can capture this, but it may accrue value to
people who really do not care even though they are affected.

2

No annual regional averages, then no heterogeneity.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

10 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Advantages of this approach
1

Travel-cost and hedonic models may underestimate the value
of air quality. Why? 
Travel-cost assumes that only people affected have value for
clean air. 
Hedonic methods can capture this, but it may accrue value to
people who really do not care even though they are affected.

2

No annual regional averages, then no heterogeneity.

3

No habituation bias. Any valuation derived from daily fluctuations will omit this effect.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

10 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Advantages of this approach
1

Travel-cost and hedonic models may underestimate the value
of air quality. Why? 
Travel-cost assumes that only people affected have value for
clean air. 
Hedonic methods can capture this, but it may accrue value to
people who really do not care even though they are affected.

2

No annual regional averages, then no heterogeneity.

3

No habituation bias. Any valuation derived from daily fluctuations will omit this effect.

4

The results are identified from short-term changes in air quality
at a given location. Hence, this mitigates concerns about unobserved local characteristics correlated with both happiness and
air quality.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

10 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Disadvantages
1

It treats responses to questions about happiness as a proxy for
utility and then makes interpersonal comparisons among
respondents.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

11 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Disadvantages
1

It treats responses to questions about happiness as a proxy for
utility and then makes interpersonal comparisons among
respondents.

2

It takes household income to be an exogenous determinant of
happiness, rather than potentially determined by happiness.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

11 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Disadvantages
1

It treats responses to questions about happiness as a proxy for
utility and then makes interpersonal comparisons among
respondents.

2

It takes household income to be an exogenous determinant of
happiness, rather than potentially determined by happiness.

As we know:

Happiness

Income

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Disadvantages
1

It treats responses to questions about happiness as a proxy for
utility and then makes interpersonal comparisons among
respondents.

2

It takes household income to be an exogenous determinant of
happiness, rather than potentially determined by happiness.

As we know:

Happiness

Jorge Rojas-Vallejos (UW)

Income

Public Goods: Air Quality

2015

11 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Data

I EPA’s Air Quality System (AQS)

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

12 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Data

I EPA’s Air Quality System (AQS)
I National Climate Data Center

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

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Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Data

I EPA’s Air Quality System (AQS)
I National Climate Data Center
I General Social Survey (GSS) by the National Opinion Research
Center (NORC)

Question
“Taken all together, how would you say things are these days? Would
you say that you are very happy (3), pretty happy (2), or not too happy
(1)?”

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

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Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Data

Figure: Example of method around population-weighted centroid.

Jorge Rojas-Vallejos (UW)

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2015

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Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Data

Figure: Example of method around population-weighted centroid.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

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Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Data

Figure: Example of method around population-weighted centroid.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

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Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Data

Figure: Example of method around population-weighted centroid.

Thiessen polygons would have been better.
Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

15 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Methodology

Focus on PM10.
6,035 useful observations out of 19,491.
Regression model:
Hijt = α Pjt + γ ln Yi + X 0ijt β + δj + ηt + δj × yeart + εijt

(1)

where:
i: respondent,
j: location,
t: date.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

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Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Methodology
Average Marginal Rate of Substitution between pollution and income,
dH = 0 =⇒ αdP + γ

1
dY + others = 0
Y

Fixing dX = dδ = dη = 0, then:

∂Y
α
ˆ
= −Y

∂P dH=0
γˆ

(2)

Equation (2) depends upon the functional form, but this is quite robust to different specifications.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

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Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Methodology

∂Y
is the average MRSYQ also called WTP.
∂P dH=0

(3)

Remark
This is the trade-off between income and air quality that will leave
people, on average, equally happy.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

18 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Methodology

Concern 1 Decision utility versus experience utility.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

19 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Methodology

Concern 1 Decision utility versus experience utility.
Concern 2 Utility is ordinal rather than cardinal, interpersonal
comparisons not reasonable. Panel data better than
pooled cross-sectional data.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

19 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Methodology

Concern 1 Decision utility versus experience utility.
Concern 2 Utility is ordinal rather than cardinal, interpersonal
comparisons not reasonable. Panel data better than
pooled cross-sectional data.
Advantage 1 People tend to show projection bias (e.g. hungry,
sunny). Hedonic estimates may be distorted. Question
about GSS imprecision should not matter.

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

19 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Results

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

20 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Results

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

21 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Results

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

22 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Results

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

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Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Results

Pretty robust estimate informs us that:

Remark
For the average income level, an individual is willing to sacrifice
$ 35 to improve in one σ air quality for one day, on average, holding
all else constant.
Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

24 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Conclusions
1. This new approach is a complement to (not a replacement of) existing methods,

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

25 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Conclusions
1. This new approach is a complement to (not a replacement of) existing methods,
2. It does not underestimate the value for air quality as travel-cost
and hedonic methods,

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

25 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Conclusions
1. This new approach is a complement to (not a replacement of) existing methods,
2. It does not underestimate the value for air quality as travel-cost
and hedonic methods,
3. It avoids the “strategic response bias”. Robust to different samples of the data and empirical specifications,

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

25 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Conclusions
1. This new approach is a complement to (not a replacement of) existing methods,
2. It does not underestimate the value for air quality as travel-cost
and hedonic methods,
3. It avoids the “strategic response bias”. Robust to different samples of the data and empirical specifications,
4. Happiness is NOT sensitive to local levels of undetectable pollutants (e.g. CO),

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

25 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Conclusions
1. This new approach is a complement to (not a replacement of) existing methods,
2. It does not underestimate the value for air quality as travel-cost
and hedonic methods,
3. It avoids the “strategic response bias”. Robust to different samples of the data and empirical specifications,
4. Happiness is NOT sensitive to local levels of undetectable pollutants (e.g. CO),
5. There is sufficient evidence to support that there is a substantial
trade-off between income and environmental quality - a compensating differential for pollution.
Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

25 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions
Health

Air pollution

Subjective Well-being

Property

Conclusions

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions
Health

Air pollution

Subjective Well-being

Property

Conclusions

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Conclusions
Health

Air pollution

NEW

Subjective Well-being

Property
Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

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Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Conclusions

6. Higher income, higher happiness,
7. Worse local air pollution, lower levels of happiness.s

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

27 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Why do we care so much?

Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

28 / 28

Index

Introduction

Happiness in economics

Data

Methodology

Results

Conclusions

Why do we care so much?

They are one reason!
Jorge Rojas-Vallejos (UW)

Public Goods: Air Quality

2015

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