Is the environment a luxury? An empirical investigation using revealed preferences and household production

• WTP and its elasticity estimated by revealed preferences and household production.
• WTP is only slightly increasing in income.
• Income elasticity of WTP for air quality is very close to one across income groups.
• U shaped relationship between the income elasticity of WTP and income classes.
• A unique data set is used for regional air quality.

This paper combines demand analysis with household production to estimate the marginal willingness to pay for improvements in air quality in Italy and the corresponding income elasticity of willingness to pay. We use choice based data on Italian households’ current consumption expenditures from January 1999 to December 2006 merged with an air quality index. We consistently find that the income elasticity of willingness to pay for environmental quality is very close to one across income groups. Besides contributing to a strand of literature where there is scant empirical evidence, we provide the first attempt at implementing the theoretical approach suggested by Ebert (2007), which derives willingness to pay and its income elasticity using revealed preferences combined with household production.