Valuing Air Quality in Indonesia Using Households’ Locational Choices

Abstract

Air quality is already at unprecedented levels in many developing countries and is projected to worsen up until 2050. At the same time, despite the known adverse impacts of air pollution, questions remain of willingness-to-pay for cleaner air as existing studies are scarce and have several endogeneity concerns. To address this knowledge gap, I apply a locational equilibrium model to data from Indonesia. This model exploits migration patterns induced by spatial variation in air quality, wages, and cost-of-living to value air quality. I control for (a) migration distance and religious preferences, and (b) endogeneity of air pollution using a wind- and distance-based fire hotspots instrument. My estimates of MWTP of $$\hbox {PM}_{2.5}$$ are higher than results from hedonic property models. I also consider heterogeneous MWTP and show that households with children and higher education level have larger valuation for clean air. In sum, this paper demonstrates a potentially novel and rigorous tool to value air quality improvements in developing countries and is an important first step to help policymakers evaluate policies to contain this growing problem.