Valuing public goods using happiness data: The case of air quality

This paper describes and implements a method for valuing a time-varying local public good: air quality. It models survey respondents' self-reported happiness as a function of their demographic characteristics, incomes, and the air pollution and weather on the date and in the place they were surveyed. People with higher incomes report higher levels of happiness, and people interviewed on days with worse local air pollution report lower levels of happiness. Combining these two concepts, I derive the average marginal rate of substitution between income and current air quality — a compensating differential for short-term changes in air pollution.

► I present a method for valuing a time-varying local public good: air quality. ► People interviewed on days with worse local air pollution report lower happiness. ► People with higher incomes report higher levels of happiness. ► Together these two concepts yield the tradeoff between income and air quality. ► A one standard deviation drop in air quality makes people worse off by about $40.