Is the Environment a Luxury? An Empirical Investigation using Revealed Preferences and Household Production

This paper addresses the issue of whether environmental quality is a luxury good meaning that its demand increases more than proportionally with respect to income. We use demand analysis and household production to estimate the marginal willingness to pay for improvements in air quality in Italy and the income elasticity of WTP. Only market data on Italian households’ current consumption expenditures from January 1999 to December 2006 merged with a unique air quality index are used. We consistently find that the income elasticity of WTP for environmental quality is very close to one across income groups and WTP decreases as a percentage of income as income increases with interesting implications for environmental policy. Besides contributing to a strand of literature where there is very scant empirical evidence, this paper provides the first attempt at estimating WTP and its income elasticity using revealed preferences and household production.