The study estimates the health benefits to individuals from a reduction in current air pollution levels to a safe level in the Kathmandu metropolitan and Lalitpur sub-metropolitan areas of Kathmandu valley, Nepal. A dose response function and a medical expenditures function are estimated for the purpose of measuring the monetary benefits of reducing pollution. Data for this study were collected over four seasons from 120 households (641 individuals) and three different locations. Household data were matched with air pollution data to estimate welfare benefits. The findings suggest that the annual welfare gain to a representative individual in the city from a reduction in air pollution from the current average level to a safe minimum level is NRS 266 per year (USD 3.70). Extrapolating to the total population of the two cities of Kathmandu and Lalitpur, a reduction in air pollution would result in monetary benefits of NRS 315 million (USD 4.37 million) per year. If the Government of Nepal implements its energy Master Plan and pollution is reduced to meet safety standards, discounted benefits over the next twenty years would be as high as NRS 6,085 million (USD 80.53 million).