Key message 2 – Although demand appears to be low for a clean environment, government policy can improve welfare.

Given the large health and economic costs of exposure to air pollution, we would expect to see households willing to pay significant sums to avoid these effects, through lobbying and self-protection (e.g., air purifiers and cleaner cook stoves). In reality, the evidence points to low willingness to pay (WTP) among those in the developing world.

For example, an International Growth Centre (IGC) funded study by Berry, Fischer, and Guiteras (2011) finds a median WTP for a water filter in Ghana of only US$ 2. Several other studies find similarly low demand for environmental quality (Kremer et al., 2011; Ito and Zhang, forthcoming). What causes this surprisingly low demand for environmental improvements? Low demand for environmental quality may simply be due to households valuing consumption more than environmental quality when they are poor. Yet this does not appear to be the whole story, since several studies fail to find a connection between assets and WTP (Berry, Fischer and Guiteras, 2011; Ashraf,
Berry, and Shapiro, 2010). Another possibility is that true WTP may be significantly higher than the values economic studies measure, due to market failures and cognitive biases that are common in developing countries:

  • Information frictions: A large body of evidence suggests that a lack of information about pollution’s effects on health keeps WTP for quality improvements low. This implies that information campaigns can be effective in stimulating investment in protection against pollution (Jalan and Somanathan, 2008; Madajewicz et al., 2007; Pattanayak and Pfaff, 2009). The way information is delivered also matters – Bennear et al. (2013) found that households in Bangladesh that received complicated information about well contamination tended to make poor choices on water usage.
  • Weak land and credit markets: Clarifying land rights and improving credit markets also appears to improve WTP for environmental improvements in developing countries by ensuring that consumers capture the benefits of their investments (Ali, Deininger and Goldstein, 2014; Guiteras, Levinsohn and Mobarak, 2015).
  • Cognitive biases: Consumers in developing countries seem to be particularly vulnerable to biases when thinking about environmental protection. Specifically, the absence of effective environmental regulations requires citizens to put in repeated, individual effort to avoid exposure to pollution (Duflo, 2012; Mullainathan, 2006). In a world where individuals have limited time and energy to make decisions, this constant burden can be mentally and physically exhausting and thus cause individuals to express a lower WTP than its “true” value
    (Vohs et al., 2008).

These frictions mean that individuals in developing countries are underinvesting in clean air. They introduce a major role for government policies to combat air pollution to improve social welfare.

Figure 2: Willingness to pay (WTP) estimates (USD)