China Economy Seminar: Using Market Data to Estimate Willingness to Pay for Clean Air

What: EC2342 China Economy Seminar
Where: Littauer M-15, Dept of Economics, 1805 Cambridge Street, Cambridge, MA 02138
When: Wednesday, April 15, 2015 @ 1:00pm

Shuang Zhang from the University of Colorado, Boulder and Koichiro Ito from Boston University and the Natural Bureau of Economic Research will speak on a joint paper entitled “Using Market Data to Estimate Willingness to Pay for Clean Air: Evidence from Air Filter Markets in China.”

Air quality is remarkably worse in less developed countries, among which China has perhaps the worst air quality in the world. A puzzle that arises from the limited evidence in developing countries is that, despite the high health burden, the valuation of environmental quality of a.ected households is very low. Using detailed monthly data on sales and price from air filter markets in 83 cities in China in 2006-2012, we estimate the marginal willingness-to-pay (MWTP) for pollution reduction in China. Using a demand model for differentiated products, controlling for model fixed effects and city-year-month fixed effects, we estimate the MWTP for 1 ug/m3 of reduction in PM10. In a second approach, we use the Huai River policy that provides free coal-based heating to the north of the river and thus generates higher pollution levels. Using a regression discontinuity design based on distance from the Huai river, we find that the market share of air filters that remove particulate matters is significantly higher just north to the Huai river. We estimate the willingness-to-pay (WTP) to reduce the pollution generated by the Huai river policy. Finally, combining our estimates on MWTP and WTP for pollution reduction with estimates on the pollution-health relationship in the literature, our analysis suggests sizable valuation for health in China, substantially higher than previously understood for the developing world based on limited evidence from very low-income countries.