This study examines the relationship between air quality and life satisfaction. Moreover, a panel structural equation modelling (SEM) is applied in order to capture the causal effect of permanent income on life satisfaction. Swiss Household Panel (SHP) Survey (2000–2013), which is a detailed micro level survey, is used for the analysis controlling for personal and household characteristics. Five air pollutants are examined in the entire analysis; ozone (O3), particulate matter (PM), carbon monoxide (CO), sulphur dioxide (SO2) and nitrogen dioxide (NO2). Furthermore, the marginal willingness‐to‐pay (MWTP) values for reducing air pollution are calculated. For the robustness checks, the SEM estimates are compared with those derived by the adapted Probit Fixed Effects (FE) model. Overall results show that MWTP values are higher for SO2 followed by O3 and NO2, while the lowest values are reported for CO and PM10. Moreover, it is found that the permanent income has a positive significant effect on life satisfaction. However, considering the SEM estimations, findings for the income effects on life satisfaction are stronger than those found from the adapted Probit FE estimates that lead to lower MWTP values.