This study analyzes the relationship between air pollutants (represented as the air quality index or AQI) and healthcare expenditure. It uses balanced monthly panel data that provides information about the healthcare expenditure, concentration of air pollutants, and regional characteristics. It considers all the variables for 16 cities and provinces in Korea for the period January 2010 to September 2017. It uses the panel data methodology to estimate the effects of air pollutants on healthcare expenditure conditional on controlling for different determinants of healthcare expenditure. The important determinants of variations in healthcare expenditure that this study identifies include the following: five air pollutants' quality indices, personal income, population share of the elderly and the young, per capita registered and operated cars, the number of industries, and atmospheric factors. Results indicate that air pollutants, NO2, O3, and PM10 exert a positive effect on healthcare expenditure. The study also sheds light on the socially optimal allocation of future healthcare resources in South Korea and shows that South Korea could reduce its healthcare expenditure by following the World Health Organization's air quality standards. The findings have three implications: developing health-conscious air quality standards; design and implementation of location-specific customized policies; health benefits of improved air quality standards. This research also provides useful evidence for policymakers to address current environmental problems.
Keywords: Air pollutants; Benefits-cost analysis; Healthcare expenditure; Korea.