Economic effects of air quality on housing prices: evidence from Beijing, China

Abstract

Air pollution is a major environmental urban issue, particularly in fast-growing cities in developing countries. Reducing air pollution is thus a challenge while evaluating the economic value of air quality is crucial for environmental policies made. However, few studies accurately estimate this value as they neglect the possible endogeneity issues, as well as the dynamic and heterogeneous effects of air pollution. Under the hedonic framework, we therefore assess the economic effect of fine particulate matter (PM_2.5) on housing prices in Beijing, China. We construct a panel based on resale apartment transactions matched with average quarterly PM_2.5 data between 2013 and 2019. To reduce the risk of an estimation bias, we apply an instrumental variable (IV) approach. Our results show that PM_2.5 is negatively associated with housing prices. Households were willing to pay an extra 0.0852% per housing unit price for an average quarterly reduction in PM_2.5 of 1 µg/m³. Furthermore, we argue that high-income dwellers tend to pay more for clean air. The negative effects of PM_2.5 across regions are significant and different. Compared with that in the basic year 2013, the negative effect increases in the first 3 years and then decreases in the last 3 years. Our findings enhance our comprehension of the economic impact of air quality and make a valuable contribution to the nuanced understanding of willingness to pay for air quality, which is beneficial in assessing and optimizing environmental regulations.