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2.3.4.1. Consumption Choices

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Environmental Economics Research at EPA


Individuals are aware of pollution and, to some extent, its effects on them. Quite apart from seeking collective remedies through regulation, they can and do alter behavior to adapt to it. Some of these adaptations are via markets and others are not economic in the narrowest sense. Individuals have latitude to choose to use air conditioners, to avoid or schedule outdoor activities, to consume additional medical care and to avoid or consume products such as bottled water and filtration systems. The present topic reviews papers that investigate these choices as their focus or tangentially. Typically, the papers present a behavioral model wherein consumers maximize utility by choosing several things including the optimal quantity of one or more of these adaptive goods. From the utility or similar function, a regression equation is derived and estimated.

You can see the full list of reports corresponding to this section in the benefits analysis - valuation - revealed - consumption choices preference subview of the subject view of the Environmental Economics Report Inventory (EERI) database.

The 1989 paper "Valuing Reduced Morbidity: A Household Production Approach in Estimating and Valuing Morbidity in a Policy Context" in the Proceedings of June 1989 AERE Workshop (EE-0120) by Dickie and Gerking uses household production theory to capture consumer adaptive behavior. Technical relationships are estimated between health attributes, private goods that affect health and air quality. The econometric effort finds that individuals equate marginal rates of technical substitution in household production of health with relevant price ratios.

The 1986 study Oxidants and Asthmatics in Los Angeles: A Benefits Analysis (EE-0218) by Rowe and Chestnut examines behavior, expenditures and willingness to pay as related to changes in air pollution and to changes in asthma symptoms. In addition to climatic and environmental factors, a panel of 82 asthmatics in Glendora, California provided survey data.

The model recognized that the subjects might engage in adaptive behavior. The survey data addressed this expectation. “... the modeling efforts indicated that if respondents who are concerned about air pollution expect a bad asthma day with air pollution as a contributing aggravating factor, they will substitute behavior in a manner that may be expected to reduce adverse asthma symptoms. These changes in behavior are potentially substantial, on the order of a 20 percent reduction in time spent in active outdoor activities.” “Of the 47 respondents employed full or part-time, 20 felt their choice of job was affected by their asthma.” “Nineteen percent ... hired help on a regular basis to perform chores that they would perform themselves if their asthma were less severe. These individuals spent an average $1,478 per year for these services ....”

In 1979, Crocker, Schulze, Ben-David and Kneese prepared Methods Development for Assessing Air Pollution Control Benefits Vol. I, Experiments in the Economics of Air Pollution Epidemiology (EE-0271A). It presents and estimates a model to value labor productivity and consumer losses due to air pollution-induced mortality and morbidity. The study recognizes the possibility of consumer choice. Individuals adapt to air pollution in part by demanding more medical services. Part of the incremental demand may be ameliorative and part restorative but no attempt at division is made.

In the econometric effort, a two-stage least squares model is developed to account for the medical demand adaptation. Mortality and morbidity were positively correlated with air pollution measures and with physicians per capita. Doctors did not increase death and illness. Rather, residents of more polluted areas demanded more medical care. A second equation was included in the regression analysis to capture the increased demand for doctors in more polluted areas.

In Valuing Reduced Morbidity: A Household Production Approach (EE0388) Dickie and Gerking (1989) posit a household production function after Becker to determine if individuals behave rationally in acquiring and combining market inputs to reduce air pollution symptoms. The vector of market inputs, the individual’s health status and an environmental variable enter several symptom reduction functions, one for each symptom. Each market input may reduce more than one symptom, i.e., joint production. The vector of symptoms enters the individual’s utility function.

The data for this exercise were obtained from a panel of 226 residents of two Los Angeles communities, one more polluted than the other. Individuals with respiratory ailments were identified and over-represented in the sample. The investigators found that “… choices are consistent with utility maximization subject to a correct understanding of the home technology.” The ratio of marginal rates of technical substitution equaled price ratios.

The 1984 paper Consumer Valuation of Health Risk: The Case of Heptachlor Contamination of Milk in Hawaii (EE-0196) by Foster and Just deals with consumer surplus losses resulting from prospective and realized environmental risk to health. The investigators construct an analytical framework and apply it to an incident of milk contamination in Hawaii from the pineapple pesticide Heptachlor. Part of the consumer surplus loss results from having consumed the tainted product and later learning of the contamination. The consumer may then be uncertain as to its long-term adverse health effects. The timing of the announcement of the contamination hence affects the consumer loss.

Estimates are made of milk demand functions that contain uncertainty variables. From these, it is possible to derive consumer surplus measures. These losses were in the range of several dollars per month per capita after disclosure of the contamination. However, public officials appear to have withheld information about the contamination. The announcement delay comprised most of the welfare loss. Needless to say milk consumption plunged after the announcement constituting part of the loss.

In 1984, Harrison, Krahl and O’Keefe wrote Using the Averting Cost Method to Estimate the Benefits of Hazardous Waste Cleanup Volume I Benefit Methodologies Applied to Hazardous Waste (EE-0269A). It considers the reaction of the town of Acton, Massachusetts and its residents to the discovery of serious contamination in the two wells that supplied 40% of the town’s municipal water. The contamination resulted from hazardous waste disposed of by a local chemical plant.

The method of the study was to bound the benefit of abatement from above by measuring the averting costs that the town and its residents incurred. Averting costs were incurred to avoid consuming the contaminated water, to treat it before consumption or to provide an alternative supply. The range of averting cost estimates is $2.2 - 19.9 million. Adaptations included use of bottled water by consumer, the expansion of an unaffected municipal and connection by the town to another municipal water system.

Another incident of water contamination was studied in 1985 by Harrington, Krupnick and Spofford in The Benefits of Preventing an Outbreak of Giardiasis Due to Drinking Water Contamination (EE-0181). The study computes the benefits that might have been realized had an outbreak giardiasis in Luzerne County, Pennsylvania been avoided. Giardiasis is a non-fatal gastro-enteric disorder caused by a protozoan which can become a substantial public health hazard if it contaminates a municipal water supply. This occurred in Luzerne County in 1983-1984. The exposed population was 75 thousand with 370 confirmed cases and many more possible cases.

Some of the losses that might have been avoided were the costs of averting actions. These included actions by individuals in purchasing bottled water and boiling tap water, additional expenses incurred by bars and restaurants, direct and other incremental costs incurred by schools and other businesses. The study provides a variety of estimates for these losses. They range from about $5 million to $22 million.

Experimental Methods for Assessing Environmental Benefits Vol. III Estimating Benefits of Reducing Community Low-Level Ozone Exposure (EE-0285A) by Gerking, Coulson, Schulze, Tashkin, Anderson, Dickie and Brookshire is an ambitious 1985 study of the effects of low-levels of ozone. Exposure may cause minor illness including chest pain, headache and general malaise. Several methods are discussed for quantifying the effect of abatement benefit: averting behavior, contingent value and direct cost. Averting behavior includes substituting indoor activities for outdoor ones or altering the time of day of outdoor activities, using air conditioners and engaging in health producing activities such as seeking additional medical care. The subject report is preliminary; data had been collected but quantification was not yet done.

Experimental Methods for Assessing Environmental Benefits Vol. III Estimating Benefits of Reducing Community Low-Level Ozone Exposure: A Feasibility Study (EE-0280D) by the same authors is a prospectus for the previous work.

Heart Disease Patients’ Averting Behavior, Costs of Illness, and Willingness to Pay to Avoid Angina Episodes (EE-0010A) by Chestnut, Colome, Keller, Lambert, Ostro, Rowe and Wojciechowski notes the link between episodes of angina and carbon monoxide. The study consists largely of a willingness to pay or contingent value exercise intended to determine patients’ negative valuation of angina episodes. The study found a value of $40-42 depending on assumptions. At least some of the subjects in this study engaged in adaptive behavior. Additional expenditures on medical care was one result. Another adaptation was the employment of third parties to perform services such as yard work and the purchase of equipment such as lawn mowers and household appliances. Such expenditures averaged $2,151 annually for 21 subjects. No attempt was made to link this result to ambient carbon monoxide. No valuation was given for a decrement of that pollutant. EE-0010B contains appendices to the study.

Valuing Changes in Drinking Water Quality Using Averting Expenditures (EE0201) by Abdalla, Epp and Roach (1990) explores both theoretically and empirically the use of averting behavior to value changes in household water quality. Averting outlays are related to willingness to pay for improvements in environmental quality; under quite general assumptions, changes in averting exenditures provide a lower bound on the value of the change in environmental quality. Using data obtained through a mail survey in two Pennsylvania communities, Doylstown and Perkasie, the authors analyzed averting expenditures following an incident of contamination with trichloroethylene. The implicit value of a statistical life derived from these averting expenditures was $2 to $2 million. This represents the first time the value of a statistical life was estimated through analysis of averting expenditures.

Broadening the Comparison of Gasoline Taxes and Cafe Standards: Discounting and Valuations of Vehicle Safety Changes (EE031), a 1993 report by Dreyfus investigates observed consumer behavior to assess the efficacy of two alternative measures to reduce transportation fuel consumption: fuel economy standards and gasoline taxes. Different vehicles produce different sets of hedonic attributes including safety and fuel efficiency and incur different cost patterns over their lifetimes. An implicit discount rate links the costs incurred at different times. Regression analysis yields values for implicit characteristics: the discount rate motorists employ and the value of a statistical life.


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