In a developing country like China, the same things that drive a city to increased prosperity (more industrial activity) tend to drive more pollution. And increased prosperity also tends to drive activities like more driving that lead to more pollution. But all else being equal, less pollution should make for a more prosperous city since people don’t like dealing with foul air.
Siqi Zheng and Jing Cao and Tsinghua University team up with UCLA’s Matthew Kahn to derive a clever estimate in “China’s Rising Demand for Green Cities:: Evidence from Cross-City Real Estate Price Hedonics” (PDF) and show that “in a typical Chinese city, about 15% of air pollution in terms of PM10 blows in from neighbor cities and the sandstorm origin, and on average, a 10% decrease of the imported pollution from neighbors is associated with a 2.5% increase in home prices.” So it seems that measures a city can take to reduce its self-generated pollution will, ceteris paribus, make it a more desirable place to live. Though it also seems that cities don’t fully internalize the negative externalities associated with air pollution anymore than firms do.