Cost of economic growth: Air pollution and health expenditure

Highlights: • The causal relationship between air pollution and health cost is analyzed. • Identification relies on the random and exogenous variations of air pollution. • China Health and Nutrition Survey data in 2015 are used. • Air pollution rises health cost and has heterogeneous effects. • Incidence, hospitalization, respiratory diseases are potential mechanism. This study examines the causal effect of air pollution on health expenditure using a sample of the China Health and Nutrition Survey in 2015. It concludes that exposure to air pollution is associated with the increase in health expenditure with an elasticity of 10.013. The coefficient is roughly seven times bigger than the cost of traditional respiratory diseases. The large coefficient will be the social cost of medical insurance and various diseases. Results also indicate that sample mobility can underestimate health cost. Meanwhile, we identify heterogeneity among different populations and pollutants. The estimates show that PM_2.5 is the main cause of health expenditure and that males, high-income individuals, highly educated individuals, people with health insurance, and older people are more sensitive to air pollution. Moreover, our evidence suggests that air pollution nonlinearly affects health expenditure. We also find that the mechanism is through diseases occurrence and diseases severity to increase health expenditure.