In a recent New York Times op-ed, University of Chicago Prof. Michael Greenstone argues that carbon emissions, generated by coal mining and petroleum extraction, should be taxed as an externality. In order for Congress to know the optimal tax, it must know the dollar value of the externality generated per unit of coal production. One way to do so is to compare house prices in local areas with a coal mine to house prices in similar local areas without a coal mine. The intuition is that there is less demand for houses near coal mines compared to houses away from coal mines, and that the price differential represents household willingness to pay to be away from carbon emissions, i.e. the dollar value of the externality on households in the neighborhood.
(a) Would this approach measure the causal effect of building a coal mine on house prices? Be sure to state the counterfactual we are attempting to evaluate.
(b) Discuss potential sources of bias that might make this empirical strategy fail to uncover the causal effect. Discuss one concrete example of omitted variables, and one concrete example of reverse causality.
(c) Propose an experiment that might be able to uncover the causal effect of building a coal mine on house prices.