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© 2022 International Monetary Fund
WP/23/35
IMF Working Paper
Institute for Capacity Development
Willingness to Pay for Clean Air: Evidence from the UK
Prepared by Giorgio Maarraoui, Walid Marrouch, Faten Saliba and Ada Wossink *
Authorized for distribution by Ali Alichi
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: This paper uses life satisfaction data to help the design of climate mitigation policies in the United Kingdom. We assess the effects of the exposure to ambient pollutants on long-term life satisfaction and short-term mental health in the UK. We estimate augmented Cobb-Douglas utility functions using pooled and random effects ordinal logit models. Results show that increases in NO2, PM10 and PM2.5 significantly decrease the odds of long-term happiness and short-term mental health in the UK. The willingness to pay for clean air is also significant and increases with level of education. These measurements derived can be used as benchmarks for pollution abatement subsidies or pollution taxes and can help in projecting a more comprehensive assessment of costs and benefits.
| JEL Classification Numbers: | C23; C26; D62; Q51; Q53 |
| Keywords: | Air Pollution; Happiness; Policy Valuation; Climate Change, Environmental Policies; Pollution Taxes; Pollution Abatement Subsidies |
| Email Addresses: | giorgio.maarraoui@postgrad.manchester.ac.uk, walid.marrouch@lau.edu.lb, fsaliba@imf.org, ada.wossink@manchester.ac.uk |
| JEL Classification Numbers: | C23; C26; D62; Q51; Q53 |
| Keywords: | Air Pollution; Happiness; Policy Valuation; Climate Change, Environmental Policies; Pollution Taxes; Pollution Abatement Subsidies |
| Email Addresses: | giorgio.maarraoui@postgrad.manchester.ac.uk, walid.marrouch@lau.edu.lb, fsaliba@imf.org, ada.wossink@manchester.ac.uk |
Contents
Abstract
1. Introduction
1.1 Background and Motivation
1.2 Objective of the Study
2. Literature Review
2.1 Previous Literature
2.1.1 Negative Effects
2.1.2 Neutral/Indeterminate Effects
2.2 Contribution to the Literature
3. Theoretical Model
4. Data
4.1 Household Data
4.1.1 Dataset Description
4.1.2 Sampling Design
4.1.3 Variables used
4.2 Pollutants Data
4.2.1 Dataset Description and Variables Used
4.2.2 Descriptive Statistics and Stylized Facts
5. Empirical Model
6. Results and Discussion
6.1 Effects of Local Air Pollutants on Life Satisfaction
6.2 Effects of Local Air Pollutants on Hedonic Happiness
6.3 The Relative Magnitudes of Pollutants on Both Happiness Measures
6.4 The Relative Magnitudes of Pollutants and Major Life Events on Happiness
6.5 The Happiness Price of Air Pollution
6.6 The Endogeneity of Income
7. Conclusion
Appendix
Bibliography
List of Figures
Figure 1: Trend mean pollutants level 2010-2019
Figure 2: Mean of pollutants by life satisfaction rank
Figure 3: Mean of Life Satisfaction across different groups
Figure 4: Willingness to pay across different groups
Figure 5: The Market for Pollution Abatement
Figure 6: Pigouvian Tax
List of Tables
Table 1: Summary of the Literature
Table 2: Description of Variables
Table 3: Summary Statistics
Table 4: Description of Pollutants
Table 5: Pollutants’ Correlation
Table 6: Pollutants on Life Satisfaction: Random Effects Ordinal Logit
Table 7: Pollutants on Life Satisfaction: Pooled Ordinal Logit
Table 8: Pollutants on Life Satisfaction: Random Effects Ordinal Probit
Table 9: Pollutants on Hedonic Happiness: Random Effects Ordinal Logit
Table 10: Pollutants on Hedonic Happiness: Pooled Ordinal Logit
Table 11: Pollutants on Hedonic Happiness: Random Effects Ordinal Probit
Table 12: Pollutants on Life Satisfaction: Pooled Ordered Logit (Standardized)
Table 13: Pollutants on Hedonic Happiness: Pooled Ordered Logit (Standardized)
Table 14: The Marginal Rate of Substitution (MRS) between Happiness and Pollutants: Heterogeneity Differences
The authors would like to thank Ali Alichi, Martin Schindler, Nathalie Reyes, Zeina Hasna and Gregor Schwerhoff for their valuable comments.