Environmental welfare analysis: A life satisfaction approach

The life satisfaction approach to environmental valuation investigates how self-rated subjective well-being (life satisfaction, “happiness”) varies with income on the one hand and environmental quality on the other. The happiness function so established allows the determining of the implicit monetary value of improved environmental quality by computing the marginal rate of substitution of income for abatement. The present paper extends the life satisfaction approach to a comprehensive welfare analysis by estimating not only the monetary benefits of air pollution abatement but also the associated costs in terms of income foregone. Using a cross-national data set with 54 countries, the paper computes (a) net marginal benefits of abatement, (b) optimal abatement rates and (c) the monetary value of optimal abatement.