Particulate matter with aerodynamic diameter ≤2.5 μm (PM2.5) increases oxidative stress through free radical generation and incomplete volatilization. In addition to affecting the respiratory system, PM2.5 causes aging- and inflammation-related damage to skin. Farnesol (Farn), a natural benzyl semiterpene, possesses anti-inflammatory, antioxidative, and antibacterial properties. However, because of its poor water solubility and cytotoxicity at high concentrations, the biomedical applications of Farn have been limited. This study examined the deleterious effects of PM2.5 on the epidermis and dermis. In addition, Farn-encapsulated liposomes (Lipo-Farn) and gelatin/HA/xanthan gel containing Lipo-Farn were prepared and applied in vivo to repair and alleviate PM2.5-induced damage and inflammation in skin. The prepared Lipo-Farn was 342 ± 90 nm in diameter with an encapsulation rate of 69%; the encapsulation significantly reduced the cytotoxicity of Farn. Lipo-Farn exhibited a slow-release rate of 35% after 192 h of incubation. The half-maximal inhibitory concentration of PM2.5 was approximately 850 μg/mL, and ≥400 μg/mL PM2.5 significantly increased IL-6 production in skin fibroblasts. Severe impairment in the epidermis and hair follicles and moderate impairment in the dermis were found in the groups treated with post-PM2.5 and continuous subcutaneous injection of PM2.5. Acute and chronic inflammation was observed in the skin in both experimental categories in vivo. Treatment with 4 mM Lipo-Farn largely repaired PM2.5-induced injury in the epidermis and dermis, restored injured hair follicles, and alleviated acute and chronic inflammation induced by PM2.5 in rat skin. In addition, treatment with 4 mM pure Farn and 2 mM Lipo-Farn exerted moderate reparative and anti-inflammatory effects on impaired skin. The findings of the current study indicate the therapeutic and protective effects of Lipo-Farn against various injuries caused by PM2.5 in the pilosebaceous units, epidermis, and dermis of skin.