Answer Happy

Additional problem 3 You are curious about the impact of airplane flights on the level of air pollution. You have measurements of the number of flights to and from each airport each day for many years, and also air pollution measures in the airport surrounding areas for those same days. = Air Pollutionit = Bo + Biflightsit + Wit You suspect there may be endogeneity as both the number of flights and pollution increase with higher economic activity and trend upward over time. Therefore, you want an instrumental variable. For each of the following po- tential IVs, discuss in a few sentences (i) whether you think they satisfy both а fundamental IV assumptions, (ii) what tests (using only observable data) you might want to perform when thinking about using the IV. a. The 9/11 attacks led the US government to ground nearly all aircraft for a short period of time. The instrument here would be a dummy variable that takes value 1 for periods just after 9/11. b. Every year, the number of flights that people take jumps up significantly around Christmas. The instrument here would be a dummy variable that equals 1 if it's the last few weeks before Christmas. c. As time goes on, airplane manufacturers develop planes that are faster, cheaper to fly, and safer. The instrument(s) here would be the quality and safety of flights at a given time. d. Airplane flights are heavily subsidized, and the amount of subsidy varies by city and over time. The instrument here would be the amount of subsidy in a given place/at a given time.