<p>With city development, economic factors, population, and industries continuing to cluster in cities, the layout of cities is becoming increasingly compact. This process leads to the aggravation of air pollution and affects social welfare. Increasing air pollution poses a growing health risk to humans, further affecting income inequality. Therefore, by combining satellite remote sensing data with city maps, this paper constructs a city shape index to describe the compactness of city layout and studies the mechanisms of city shape, air pollution, and income inequality. The study results show that compact cities can help reduce income inequality, but they also increase air pollution. The more serious air pollution in cities leads to greater income inequality. In addition, air pollution leads to a weaker effect of compact city shape on narrowing income inequality. This paper discusses how the compactness of urban layouts shapes social welfare by influencing air pollution and income inequality.</p>