A Demand Side Test for Avoiding Type I Error in Environmental Equity Analyses

Equity issues have led many economists to re-consider their preference for conducting efficiency analyses with aggregated estimates of the benefits and costs of changes in environmental resource allocations. For instance, there is evidence that health risks due to hazardous wastes disproportionately affects the poor and non-white. Policies that lead to these disproportionate effects are not necessarily inefficient, however. The classic efficiency/equity tradeoff is apparent in much environmental policy. The purpose of this paper is to propose a demand-side test for environmental equity. The test, which is based on a technique adapted from the labor economics of wage discrimination, allows the identification of potential Type I errors in environmental equity analyses. Applying the test to the demand for water quality, we find that willingness to pay for a potential policy are not equal for white and non-white survey respondents. The empirical results lead to some observations about environmental equity analyses.