Local Air Quality and Economic Inequality in Finland

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School of Business | Master's thesis
Degree programme
37 + 8
This master’s thesis calculates the distribution of an adjusted income in Finland for 2015. Adjusted income is calculated by deducting damages from exposure to fine particles (PM2.5) from average market income. When including the damages into annual income measurement, the income distribution becomes less evenly spread. This suggests that the damages are not distributed equally within the income quintiles. Contrary the study made by Muller et al. (2018) in United States, the PM2.5 levels in Finland are on average higher the more affluent the area is. However, the lower income quintiles experience higher damages. The main reason for this lies within the age of population in these quintiles: lower income quintiles have higher shares of older population, who inherently are more vulnerable to air pollution. This leads to a change in the share of income in income quintiles: the top quintile relatively gains 0.7 percentage points while the bottom quintile loses 0.5 percentage points. Only the middle quintile is not affected by the inclusion of the air pollution externality. Damage per market income values show how many percent is the average damage relative to average income for the population in a grid belonging to that area. Interestingly enough the maximum share is not the highest in Southern Finland, which has the highest maximum for PM2.5 levels. The higher the damage/market income ratio is only for a certain group of population, the higher will be the Gini coefficient for adjusted income. The monetary benefits from fine particle reduction should be taken into consideration when policies regarding air quality and health of the population are considered. When the PM2.5 levels are reduced by 30 percent, total savings for the year 2015 would lead to 1.1 billion euros and the Gini coefficient for adjusted income would drop from 0.155 to 0.150. However, as the population of Finland is getting older, the savings would be even bigger in the future. From the decreased Gini coefficient and the savings in damages we can separate two channels: income effect and redistribution effect. So, environmental policy aiming to decrease the level PM2.5 can increase the level of economic welfare and change the distribution of said welfare more equal. According to the law of diminishing marginal utility, total welfare would be increased.
Thesis advisor
Saarimaa, Tuukka
Liski, Matti
economic inequality, air quality, Gini coefficient, value of a statistical life
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