The Role of Environmental Amenities in the Urban Economy: Evidence From a Spatial General Equilibrium Approach

Abstract

Environmental amenities play an important role in residential location decisions, which in turn affect the concentration of consumption and production activities. In this paper, I develop and estimate a spatial general equilibrium model to examine how environmental amenities affect the spatial distribution of urban economic activities and their welfare consequences. The model characterizes household location and consumption decisions, production decisions, as well as urban agglomeration and dispersion forces. The empirical analysis leverages a natural experiment of pollution monitoring and information disclosure program and recovers key underlying parameters using fine-scale travel data on commuting and consumption trips and environmental amenities. The analysis shows that job access, residential amenities, and consumption access account for 49%, 30% and 21% of overall attractiveness of a residential location, respectively. A one-standard-deviation change in air quality leads to a 0.24-standard-deviation change in individuals’ perceived amenity level. Counterfactual simulations suggest an 8.4% welfare gain if individuals were to fully incorporate environmental amenities into their decisions, compared to the scenario of not incorporating their impacts. The welfare difference is driven by changes in residential and workplace locations, as well as consumption and production decisions.