ARE Professors Shapiro and Walker publish in the American Economic Review

The paper examines the cost-effectiveness of reducing local air pollution. The authors leverage the existence of a patchwork of local offset markets, in which new polluters must either reduce their emissions or buy emission rights from incumbents. According to economic theory, the market price of these offsets reflects the marginal cost of abatement for firms. Having compiled prices from dozens of these markets, Shapiro and Walker compare them to model-based estimates of the marginal benefits of reducing pollution. They find that in most locations, marginal benefits exceed marginal costs—often by more than a factor of ten. This finding suggests that regulation remains, if anything, too lenient.