(Working Paper, 2016)

We develop a framework to estimate willingness to pay (WTP) for clean air from defensive investments on differentiated products. Applying this framework to scanner data on air purifier sales in China, we find that households are willing to pay $1.34 per year to remove 1 µg/m3 of PM10 and $32.7 per year to eliminate policy-induced air pollution created by the Huai River heating policy. Substantial heterogeneity in WTP is explained by household income and exposures to media coverage on air pollution. Using these estimates, we examine welfare implications of existing and counterfactual environmental policies in China.