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This paper applies the Latent Class (LC) approach to investigate households’ preferences on air quality and study environmental externalities in China’s coal-based power sector. We conduct a choice experiment where people are asked to choose among three hypothetical air quality improvement options and status quo characterized by different attributes. Reduction of CO2 emissions and PM2.5 (dust emissions), acid rain (SO2 and NOx emissions) and additional electricity bill are presented to respondents as attributes. Our results show that all levels of attributes were statistically significant and positive contributors to welfare. The results implies that the households in China are willing to pay an additional electricity bill for air quality improvement related to coal-based power sector, and willing to pay more for better air quality. Keywords-coal-based power sector; environmental externalities; choice model; willingness to pay; China

Valuation of Environmental Externalities in China s Coal-fired Power Generation: A Latent Class Approach