Trans-Boundary Air Pollution Spillovers: Physical Transport and Economic Costs by Distance

Department of Decision Sciences and Managerial Economics


The economic costs of trans-boundary pollution spillovers versus local effects is a necessary input in evaluating centralized versus decentralized environmental policies. Directly estimating these for air pollution is difficult because spillovers are high-frequency and vary with distance while economic outcomes are usually measured with low-frequency and local pollution is endogenous. We develop an approach to quantify local versus spillover effects as a flexible function of distance utilizing commonly-available pollution and weather data. To correct for the endogeneity of pollution, it uses a mixed two-stage least squares method that accommodates high-frequency (daily) pollution data and low-frequency (annual) outcome data. This avoids using annual pollution data which generally yields inefficient estimates. We apply the approach to estimate spillovers of particulate matter smaller than 10 micrograms (PM10) on manufacturing labor productivity in China. A one μg/m3 annual increase in PM10 locally reduces the average firm’s annual output by CNY 45,809 while the same increase in a city 50 kilometers away decreases it by CNY 16,248. The spillovers decline quickly to CNY 2,847 at 600 kilometers and then slowly to zero at about 1,000 kilometers. The results suggest the need for supra-provincial environmental policies or Coasian prices quantified under the approach.