Avalaible online at http://journals.ums.ac.id Jurnal Ekonomi Pembangunan, 16 (2), Desember 2015, 146-157 Jurnal Ekonomi Pembangunan, ISSN 1411-6081 146 Measuring the Impact of Urban Air Pollution: Hedonic Price Analysis and Health Production Function Endah Saptutyningsih, Ahmad Ma’ruf Department of Economics, Muhammadiyah University of Yogyakarta Jalan Lingkar Selatan, Tamantirto, Kasihan Bantul, Yogyakarta, Indonesia 55283 Correspondence e-mail: endahsaptuty@gmail.com, macrov_jogja@yahoo.com Received: June 2015; Accepted: October 2015 Abstract This study aims to value air quality from the urban housing market in Yogyakarta City. It is also provides estimation of marginal willingness to pay for the air quality improvement and estimation of the consumer surplus due to reduce of air quality. The methodological framework for estimation is based on a hedonic price model. The result of hedonic price method concludes that by adopting a two-stage estimation procedure to estimate the relationship between air quality and property value, on the average, an increase in the level of O3 by one percent will increases the property price by 0.063 percent. By using a health production function and demand function mitigation can be seen that the medical history of the individual has effect on the number of working days lost. Meanwhile, O3 pollution has positive effect on the amount of medical expenses for mitigation. Decreasing in O3 pollution causes a decrease in the level of medical expenses to mitigate. Therefore, it is important to reduce the negative impacts of air pollution. Keywords: willingness to pay, hedonic price, consumer surplus, health production function JEL Classification: Q51, Q53, I12, I20 Mengukur Dampak Polusi Udara Perkotaan: Analisis Harga Hedonik dan Fungsi Produksi Kesehatan Abstrak Studi ini bertujuan untuk menilai kualitas udara ditinjau dari pasar properti di Kota Yogyakarta. Studi ini juga mengestimasi marginal willingness to pay perbaikan kualitas udara dan estimasi surplus konsumen karena adanya penurunan kualitas udara. Kerangka metodologis untuk estimasi didasarkan pada model hedonic price. Hasil metode hedonic price menyimpulkan bahwa dengan mengadopsi prosedur estimasi dua tahap untuk mengestimasi hubungan antara kualitas udara dan nilai properti, peningkatan level O3 sebesar satu persen akan menaikkan harga properti sebesar 0,063 persen. Dengan menggunakan fungsi produksi kesehatan dan fungsi permintaan mitigasi dapat dilihat bahwa riwayat kesehatan individu memiliki efek terhadap jumlah hari kerja yang hilang. Polusi O3 memiliki efek positif terhadap jumlah pengeluaran medis untuk mitigasi. Penurunan level polusi O3 menyebabkan penurunan pengeluaran medis untuk mitigasi. Oleh karena itu, sangatlah penting untuk mengurangi dampak negatif polusi udara. Kata kunci: willingness to pay, hedonic price, surplus konsumen, fungsi produksi kesehatan Klasifikasi JEL: Q51, Q53,I12, I20 1. Introduction The increasing number of land conversion and lack of green open spaces in urban areas is one of the consequences of the increase in economic activities in urban areas. It is characterized by the increasing number of residential, industrial, commercial centers and others. However, circumstances which developed economically but was not offset by the improvement of ecology. Many environmental problems arise from the disruption of the ecological balance eg increasing temperatures, coastal erosion, air