We combine survey responses to subjective well-being (SWB) questions with air pollution data to recover Chinese residents' valuation of air quality improvements. Motivated by theoretical models of ‘projection bias’ and ‘recency bias’, we posit that one's SWB (and valuation) is affected disproportionately by more recent experiences with air pollution, even though long-term air pollution is more detrimental to one's actual well-being.

A large body of literature estimates the effect of air pollution on health. However, most of these studies have focused on physical health, while the effect on mental health is limited. Using the China Family Panel Studies (CFPS) covering 12,615 urban residents during 2014 – 2015, we find significantly positive effect of air pollution – instrumented by thermal inversions – on mental illness.

Identifying a demand function for air quality is a key input to calculate welfare measurements of pollution abatement policies. We defined intra-urban housing submarkets to apply a Second Stage hedonic pricing model that allowed us to identify an inverse demand function for PM10 reductions in Bogotá. The monthly benefits of compliance with the U.S. Environmental Protection Agency standard (50 μg/m3 – annual average), and the far more stringent World Health Organization standard (20 μg/m3 – annual average) are valued at US$12.16 and US$189.64 per household, respectively.