(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 159

134 PART 2 • Producers, Consumers, and Competitive Markets
APPLYING CONSUMER SURPLUS Consumer surplus has important applications in economics. When added over many individuals, it measures the aggregate
benefit that consumers obtain from buying goods in a market. When we combine
consumer surplus with the aggregate profits that producers obtain, we can evaluate both the costs and benefits not only of alternative market structures, but of
public policies that alter the behavior of consumers and firms in those markets.

EXAMPLE 4 .6

THE VALUE OF CLEAN AIR

Air is free in the sense that we
don’t pay to breathe it. But the
absence of a market for air may
help explain why the air quality
in some cities has been deteriorating for decades. To encourage cleaner air, Congress passed
the Clean Air Act in 1977 and
has since amended it a number
of times. In 1990, for example, automobile emissions controls were tightened. Were these controls
worth it? Were the benefits of cleaning up the air
sufficient to outweigh the costs imposed directly
on car producers and indirectly on car buyers?
To answer these questions,Congress asked the
National Academy of Sciences to evaluate emissions
controls in a cost-benefit study. Using empirically

determined estimates of the
demand for clean air, the benefits
portion of the study determined
how much people value clean air.
Although there is no actual market for clean air, people do pay
more for houses where the air is

clean than for comparable houses
in areas with dirtier air. This information was used to estimate the demand for clean
air.8 Detailed data on house prices in neighborhoods
of Boston and Los Angeles were compared with the
levels of various air pollutants. The effects of other
variables that might affect house values were taken
into account statistically. The study determined
a demand curve for clean air that looked approximately like the one shown in Figure 4.16.

Value
(dollars per pphm 2000
of reduction)

F IGURE 4.16

VALUING CLEANER AIR
The yellow-shaded triangle
gives the consumer surplus
generated when air pollution
is reduced by 5 parts per 100
million of nitrogen oxide at
a cost of $1000 per part reduced. The surplus is created
because most consumers
are willing to pay more than
$1000 for each unit reduction
of nitrogen oxide.

A

1000

0

8

5

10

NOX (pphm)
pollution reduction

The results are summarized in Daniel L. Rubinfeld, “Market Approaches to the Measurement of the
Benefits of Air Pollution Abatement,” in Ann Friedlaender, ed., The Benefits and Costs of Cleaning the
Air (Cambridge: MIT Press, 1976), 240–73.