People value having clean air much more than previously thought, according to research by Simon Luechinger published in the March 2009 issue of the Economic Journal. This suggests that the government should sanction tougher environmental standards than exist at the moment.

The report uses survey evidence to see how much people value clean air. The
results clearly indicate that the assumptions typically used by governments to assess which environmental projects to pursue are too timid – traditional methods may understate the value of clean air by an order of magnitude.

Simon Luechinger comments:

''One conclusion that can be safely drawn is that air pollution is more important for the population affected than previously thought. Thus, more and stricter regulations in the environmental realm seem justified.''

Traditionally, researchers either asked people directly how much they would be willing to pay for better air quality or inferred the value of clean air from house prices and other market behaviour. Both approaches have problems. People may not take surveys seriously or, if they do, they might try to influence policy with their response. Using house prices may not be accurate due to other costs of moving house and if people find it hard to assess air quality before they buy.

To deal with this, the report combines data on air pollution with survey data on people''s self-reported life satisfaction. It uses these data to calculate the effect of air pollution on life satisfaction, and the effect of higher income on life satisfaction. It then calculates the money value of air pollution.

The report uses this approach to estimate the effect of sulphur dioxide in Germany for the years 1985-2003 and combines pollution data with the survey responses of around 29,000 individuals, who are observed over six years on average. Over this period, Germany experienced dramatic improvements in air quality.

There are many reasons for improvements in air quality, not all of which will make people happy. For example, better air quality may be due to a slump in local economic activity. In order to eliminate these complicating factors, the study isolates changes in air quality that are caused purely by environmental regulation. It then looks at what effect this change has on people''s life satisfaction.

According to the report''s estimates, air pollution has large and significant negative effects on people''s life satisfaction. So it seems that people would be willing to pay a high price for cleaner air if they could. Indeed, this price is an order of magnitude higher than previously estimated.

So the increasing importance attached to environmental issues in many countries seems warranted. In addition, proposed regulation rejected because the monetary value of environmental benefits was judged to be too small may be worth reconsidering.

''Valuing Air Quality Using the Life Satisfaction Approach'' by Simon Luechinger is published in the March 2009 issue of the Economic Journal.