How does air pollution affect household consumption? Evidence from China

Increasing air pollution not only affects the population’s health but also changes its consumption structures and patterns. Using China Family Panel Studies, this study investigates the relationship between air pollution and household consumption. The findings reveal that household consumption is considerably affected by air pollution: One standard deviation rise of PM2.5 concentration will decrease the household consumption by 8.7%. Moreover, this effect is irreversible in the short term. What is more, air pollution has significantly changed consumption structure and patterns. Heterogeneous analysis indicates that the influence of air pollution on consumption generates the so-called Matthew Effect, wherein medium and low-income and rural households are exposed to a greater negative effect. Mechanism tests indicate that air pollution may reduce household consumption through three channels: increase negative emotions, decrease outdoor activities, and depress future expectations. The conclusions drawn in this paper enrich our understanding of the economic impact caused by air pollution and bring important significance to the government in promoting the coordination and sustainable development of the environment and economy.