A large body of literature estimates the effect of air pollution on health. However, most of these studies have focused on physical health, while the effect on mental health is limited. Using the China Family Panel Studies (CFPS) covering 12,615 urban residents during 2014 – 2015, we find significantly positive effect of air pollution – instrumented by thermal inversions – on mental illness. Specifically, a one-standard-deviation (18.04 μg/m3) increase in average PM2.5 concentrations in the past month increases the probability of having a score that is associated with severe mental illness by 6.67 percentage points, or 0.33 standard deviations. Based on average health expenditures associated with mental illness and rates of treatment among those with symptoms, we calculate that these effects induce a total annual cost of USD 22.88 billion in health expenditures only. This cost is on a similar scale to pollution costs stemming from mortality, labor productivity, and dementia.
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