Shanjun Li, Cornell Institute for China Economic Research

Understanding the health impact of air pollution and consumer willingness to pay for clean
air (WTP) is critical for understanding the benefit of environmental regulations. Based on the universe of credit and debit card transactions in China from 2013-2015, this paper quantifies the health impacts of PM2.5 and estimates consumer WTP for improved air quality. To our knowledge, this is the first comprehensive analysis of how air pollution affects health expenditures for the entire population of a developing country. To address potential endogeneity in air quality, we construct an instrumental variable by modelling the spatial spillovers of PM2.5 due to long-range transport. Our analysis shows that PM2.5 has significant impacts on health spending in both short term and long term. A permanent reduction of 10 mg/m3 in daily PM2.5 would lead to total annual savings of at least 75 billion Yuan ($11 billion) in health spending in China. The estimates suggest a lower bound of annual household WTP of $25 for a 10 mg/m3 reduction in PM2.5.