Evaluating the optimal air pollution reduction rate: Evidence from the transmission mechanism of air pollution effects on public subjective well-being

Abstract

Estimation of the effects of air pollution on residents' subjective welfare, which is always monetized as willingness to pay (WTP), is essential for policymakers to set the optimal abatement targets. This paper adopts Life Satisfaction Approach to explore the mechanism of air pollution affecting residents' subjective well-being (SWB), and calculates the optimal abatement rate. Based on CGSS data, we use the Probit model and the instrumental variables method to conduct empirical analysis. Results show that the positive indirect effect of air pollution through economic growth channel covers nearly 1/3 of the negative direct effect on SWB, which reduces people's willingness to pay for pollution control. Under the maximization of SWB, the optimal reduction rate is 62.857%. To achieve the optimal rate, about 5% of per capita GDP would have to be sacrificed, equivalent to a 20% increase in physical capital stock per capita, or a 13% boost of the human capital stock. When residents have lower education and higher self-rated health, the transmission mechanism amplifies the extent to which the indirect effects mask the direct effects, and the optimal reduction rate drops to 50%. • Explore the effects of air pollution on residents' SWB by LSA. • Construct the ventilation coefficient as the instrument to alleviate the endogeneity. • Further gauge the public's WTP for air pollution treatment. • Estimate the optimal air pollution rate of China by happiness data.