Property prices and the value of amenities

Implicit hedonic prices of amenities are estimated by means of a study of the variation in house prices in Sydney. The results include estimated hedonic prices for aircraft noise, road traffic, road widening, good views, spacious streets, good access to shops, and high quality neighborhoods. Since hedonic prices are the response of the market at the margin to supply as well as demand forces, they do not necessarily reflect average household willingness to pay prices. However, the paper concludes that they provide a basis from which the values of amenities to be used in benefit cost studies can be estimated.     

Willingness to pay for clean air in China

We use a residential sorting model incorporating migration disutility to recover the implicit value of clean air in China. The model is estimated using China Population Census Data along with PM2.5 satellite data. Our study provides new evidence on the willingness to pay for air quality improvements in developing countries and is the first application of an equilibrium sorting model to the valuation of non-market amenities in China. We employ two instrumental variables based on coal-fired electricity generation and wind direction to address the endogeneity of local air pollution. Results suggest important differences between the residential sorting model and a conventional hedonic model, highlighting the role of moving costs and the discreteness of the choice set. Our sorting results indicate that the economic value of air quality improvement associated with a one-unit decline in PM2.5 concentration is up to $8.83 billion for all Chinese households in 2005.     

Amenity changes,property values,and hedonic prices in a closed city

The effects of changes in amenity levels on the bid prices for land and on the marginal worth of an amenity are examined. The vehicle for analysis is a closed-city urban spatial model containing an explicit utility function and explicitly specified, spatial distributions of amenities. Issues addressed include the behavior of bid price (and property value) schedules in response to amenity changes; the impact of such changes on the utility of renters, under conditions of both identical and disparate tastes; the effect of amenity changes on the amenity's schedule of marginal worth; and the relation of such a schedule in a closed city to that in an open city.     

Which hedonic models can we trust to recover the marginal willingness to pay for environmental amenities?

The hedonic property value model is among our foremost tools for evaluating the economic consequences of policies that target the supply of local public goods, environmental services, and urban amenities. We design a theoretically consistent and empirically realistic Monte Carlo study of whether omitted variables seriously undermine the method’s ability to accurately identify economic values. Our results suggest that large gains in accuracy can be realized by moving from the standard linear specifications for the price function to a more flexible framework that uses a combination of spatial fixed effects, quasi-experimental identification, and temporal controls for housing market adjustment.     

Valuing environmental amenities through inverse optimization: Theory and case study

Amenity values of private forests are implicit but play a critical role in decision and policy making. This study presents an innovative valuation approach integrating techniques of operations research and economic theory of pricing environmental goods. A forest planning problem was inversed through altering its reward function of timber values so that the observed harvesting behavior became optimal. The discrepancy between the original and new rewards uncovered amenities values which were linked to forest attributes via hedonic models. This method was applied to a case study of the U.S. southern pine region. Depending on forest conditions, total economic values of amenities varied from zero to just under one thousand dollar per ha. At a discount rate of 3%, a typically managed forest generated on average $243 ha⁻¹ of amenities values per annum, more than twice of harvested timber values. Structural diversity and density of large pine trees were the key determinants to preserving forests for environmental amenities.     

Public Timber Supply, Market Adjustments, and Local Economies: Economic Assumptions of the Northwest Forest Plan

Abstract:  The Northwest Forest Plan in the Pacific Northwest sought to stabilize local economies, including local employment and income, by stabilizing the flow of wood fiber from public forests. This is also a common forest management objective in other regions and countries. Because this economic strategy ignores basic market adjustments, it is likely to fail and to unnecessarily damage forest ecosystems. Application of basic economic principles on how markets operate significantly changes the apparent efficacy of efforts to manage local economies by managing timber supply. The emphasis on timber supply tends to ignore the dominant role that the demand for wood fiber and wood products, rather than wood-fiber supply, plays in determining levels of harvest and production. Contemporary economics indicates that markets tend to operate to offset reductions in wood-fiber supply. This significantly moderates the economic cost of reducing commercial timber harvest in the pursuit of environmental objectives. In addition, contemporary economic analysis indicates that the economic links between natural forests and local communities are much broader than simply the flow of commercially valuable logs to manufacturing facilities. At least in the United States, the flow of environmental services from natural forests has increasingly become an amenity that has drawn people and economic activity to forested areas. Attractive site-specific qualities, including those supported by natural forests, can potentially support local economic development even in the face of reduced timber harvests. These market-related adjustments partially explain the Northwest Forest Plan's overestimation of the expected regional impacts associated with reduced federal timber supply and the ineffectiveness of the plan's efforts to protect communities by stabilizing federal timber supply.     

An integrated model of regional and local residential sorting with application to air quality

We examine the interconnectedness of demand for regionally and locally varying public goods using a residential sorting model. We propose a version of the model that describes household choices at the city (MSA) level and, conditional on city, the neighborhood (census tract) level. We use a two-stage budgeting argument to develop an empirically feasible sorting model that allows us to estimate preferences for regionally varying air quality while accounting for sorting at the local level. Our conceptual and empirical approach nests previous sorting models as special cases, allowing us to assess the importance of accounting for multiple spatial scales in our predictions for the cost of air pollution. Furthermore our preferred specification connects the city and neighborhood sorting margins to the upper and lower elements of a nested logit model, thereby establishing a useful correspondence between two stage budgeting and nested logit estimation. Empirically we find that estimates from a conventional model of sorting across MSAs imply a smaller marginal willingness to pay for air quality than estimates from our proposed model. We discuss how the difference is attributable in part to the omitted variable problems arising when tract level sorting is ignored.     

Is energy efficiency capitalized into home prices? Evidence from three U.S. cities

We test for evidence that energy efficiency features are capitalized into home prices in three U.S. metropolitan areas. Using hedonic regressions and multiple matching procedures, we find that Energy Star certification is associated with higher sales prices in two of the markets: the Research Triangle region of North Carolina and Portland, Oregon. We find that local “green” certifications in Portland and in Austin, Texas, are also associated with higher prices and that the estimated price impacts are larger than those from Energy Star. Matching on observables proves to be important in some cases, reducing the estimated impacts compared with models without matching. We calculate the implied energy savings from the estimated premiums and find that, in the Research Triangle market, the Energy Star premiums approximately equal the savings that program is designed to achieve, but in Portland, the premiums are slightly greater than the program's savings due to low energy costs in the region.     

Intertemporal production externalities,technical change,and public expenditure analysis

This paper discusses the implications of relative price change for public expenditure analysis involving natural environments. It develops a model which identifies those demand and supply factors which must be considered in the evaluation of the time stream of benefits associated with the amenity services provided by natural environments in their preserved status.     

Measuring values for environmental resources under uncertainty

The relationship between conventional Hicksian measures of the benefits from changes in environmental amenities under certainty, and corresponding measures of valuation when the conditions of access to an uncertain environmental resource are changed, is considered. The analysis utilizes a contingent commodity framework with the assumption of state-dependent preferences. The findings suggest that the valuation of these changes will depend upon the availability of fair markets for diversifying risk. Moreover, conventional measures of compensating or equivalent surplus will not necessarily bound the individual's valuation of a change in access to an uncertain environmental resource.     

Crediting uncertain ecosystem services in a market

The margin of safety (MOS) approach is an increasingly prevalent tool for ensuring the integrity of market-based programs for providing ecosystem services. Over-crediting is reduced by setting aside mean estimates of uncertain services in favor of a more conservative estimate. Like many environmental policy problems, ecosystem service markets involve the aggregation of uncertainty over multiple scales, e.g. from landowners to market intermediaries to the overall market. We examine how the MOS instrument affects, and is affected by, an ecosystem services market. We show that the common bottom-up approach of imposing risk preferences at a local, disaggregated level—held over from earlier development in the context of toxics and command and control-style health risk regulation—leads to several unintended consequences. Furthermore, discounting landowner services can actually increase their profits, conditional on the elasticity of credit demand. We illustrate theoretical insights with an empirical application to greenhouse gas offset crediting in agriculture.     

Redistribution and pollution taxes with non-linear Engel curves

This paper analyses optimal corrective taxation and optimal income redistribution. The Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, under general utility functions, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods. However, if Engel curves are linear, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all have linear Engel curves. If Engel curves are linear, and if pollution taxes are not optimised, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.     

Hartwick's rule and maximin paths when the exhaustible resource has an amenity value

This paper studies the maximin paths of the canonical Dasgupta–Heal–Solow model when the stock of natural capital is a direct argument of well-being, besides consumption. Hartwick's rule then appears as an efficient tool to characterize solutions in a variety of settings. We start with the case without technical progress. We obtain an explicit solution of the maximin problem in the case where production and utility are Cobb–Douglas. When the utility function is CES with a low elasticity of substitution between consumption and natural capital, we show that it is optimal to preserve forever a critical level of natural capital, determined endogeneously. We then study how technical progress affects the optimal maximin paths, in the Cobb–Douglas utility case. On the long run path of the economy capital, production and consumption grow at a common constant rate, while the resource stock decreases at a constant rate and is therefore completely depleted in the very long run. A higher amenity value of the resource stock leads to faster economic growth, but to a lower long run rate of depletion. We then develop a complete analysis of the dynamics of the maximin problem when the sole source of well-being is consumption, and provide a numerical resolution of the model with resource amenity. The economy consumes, produces and invests less in the short run if the resource has an amenity value than if it does not, whereas it is the contrary in the medium and long runs. However, and without surprise, the resource stock remains for ever higher with resource amenity than without.     

Forest Taxation and Rotation Age under Private Amenity Valuation: New Results

This paper studies the impact of harvesting, property, and profit taxes on private rotation age in an ongoing rotations model, where the private landowner is interested not only in the present value of harvest revenue, but also in the private amenity services provided by the forest stand. The main finding of the paper is that conventional wisdom about the rotation effects of forest taxes, distilled from the Faustmann model, predominantly ceases to hold. This is because forest taxes distort the relative profitability of timber and amenity production in a way that is sensitive to the precise nature of amenity valuation. Therefore, the design of forest tax policy necessitates good knowledge of the landowner's objective function concerning the type of amenity services.     

Environmental regulation as a double-edged sword for housing markets: Evidence from the NOx Budget Trading Program

We investigate the effects of environmental regulations on housing markets using a quasi-experimental setting—the NO_x Budget Trading Program (NBP). Hedonic theory predicts that house prices should rise as pollution levels decrease. However, environmental regulations may also affect labor markets, and thus housing demand. Employing a difference-in-differences framework, we find that house prices shifted up in the regulated areas with low manufacturing intensity, whereas in the areas with high manufacturing intensity, housing markets were weakened. We also find that in high-manufacturing-intensity areas, loan application volume declined, rejection rate augmented, and the probability of loan default increased.     

Site rent,air quality,and the demand for amenities

There has been considerable debate as to the information contained in the coefficients of a cross-sectional regression of site rent on air quality. Much of the confusion surrounding the analysis of the relationships (a) between air quality changes and property value changes, (b) between property value changes and benefits derived from quality changes, and (c) between the estimated cross-sectional coefficients and all of the above, can be cleared up by a discussion of the meaning of the hedonic equation. In that context, the implications for demand analysis are clarified.     

Hedonic housing prices and the demand for clean air

This paper investigates the methodological problems associated with the use of housing market data to measure the willingness to pay for clean air. With the use of a hedonic housing price model and data for the Boston metropolitan area, quantitative estimates of the willingness to pay for air quality improvements are generated. Marginal air pollution damages (as revealed in the housing market) are found to increase with the level of air pollution and with household income. The results are relatively sensitive to the specification of the hedonic housing price equation, but insensitive to the specification of the air quality demand equation.     

Valuing congested recreation sites

This note discusses the issue of measuring consumers' surplus at crowded facilities. It is argued that surplus should be measured with congestion held constant. The area under an aggregate demand curve which has congestion varying has no normative significance. Whether travel cost demand curves estimated for congested facilities properly measured consumers' surplus depends on the sampling procedure and the specification of the demand curves.     

Exploring the future of European crop production in a liberalised market, with specific consideration of climate change and the regional competitiveness

Long-term future development of European agriculture within the global market is highly uncertain, but can potentially have large impacts on the future of agricultural businesses, rural communities and amenities such as traditional landscapes and biodiversity. Despite great uncertainties it is of interest to explore the extent of these potential changes. This paper provides an explorative scenario of the European crop production in a liberalised world without European Union (EU) market interventions. The results do not form a prediction or a business as usual scenario, but rather a plausible and salient thought-experiment of a possible future based on the consistent integration of current conceptual and quantitative models.Future scenarios for climate, demography, technology and global demand for agricultural commodities are used to assess the competitiveness of European agriculture. Regional economic competitiveness is determined by combining indicators for the economic strength of farms in a region and population pressure on agricultural land, and subsequently used to determine where agricultural production is likely to sustain under the market liberalisation scenario. The method is illustrated for the 27 EU member state countries for three commodities: wheat, potato and milk (relying on grass).Results include maps of the dominant wheat, potato and milk producing regions across Europe as projected for 2050. They show that due to increased agricultural productivity, less agricultural land will be needed to supply the European demand for food and feed. In addition, production will concentrate in those regions which have a comparative advantage. This potentially leads to a strong polarisation between north-western Europe and southern Europe, which faces negative impacts of climate change and central and northern Europe where agricultural businesses lag in economic strength and farm size. A contrasting policy intervention scenario illustrates how differences in demand and productivity result in an expansion of the agricultural area, especially for the production of wheat.Although the complete liberalisation scenario may seem unlikely, and the underlying assumptions have great uncertainty, the results help identify and map market pressures on agricultural land use across regions in Europe. As such, it stimulates policy debate on the desired future for the European agricultural sector and the trade-offs between economic competitiveness under global market conditions and policy intervention. In addition, it provides a basis for the planning of alternative economic strategies for agriculturally less competitive regions.     

Urban fuelwood demand and markets in a small town in South Africa: Livelihood vulnerability and alien plant control

Fuelwood is the primary energy for most households throughout the developing world. With increasing urbanization and declining local availability of fuelwood, a growing proportion of households obtain their fuelwood by purchasing it. These fuelwood markets are the key nexus in supply and demand scenarios and can be potentially significant points for intervention to address energy security amongst the urban poor. This paper reports on the fuelwood demand and marketing in a small town in South Africa. Despite the availability of more modern fuels and state subsidization of electricity, fuelwood was still used by half the households. Annual demand was 1.2 t per household. Over half of the households bought their fuelwood requirements because local stocks were limited. Those households that did collect their own fuelwood were significantly poorer than households that purchased fuelwood, as well as households that did not use fuelwood at all. Fuelwood markets operated through 45-60 vendors who transported fuelwood from further afield. Income from the fuelwood trade was low, but was strongly linked to hours worked. Thus, vendors working a full week did earn a meaningful income, especially in the context of high unemployment in the area. Fuelwood vendors also provided casual employment opportunities for unskilled labour. Most vendors harvested fuelwood from commonage lands, with most of the wood being from alien species. Local stocks of wood are declining in the face of constant transformation of commonage to residential areas, and a national water and biodiversity conservation programme to eradicate alien plants. This decline poses a threat to the financial viability of fuelwood markets. Yet, an opportunity exists to incorporate the vendors into the alien plant clearing programme, since they already perform such a function.