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Environmental Economics Research at EPA

Hedonic property value studies are undertaken as one of several possible methods to quantify the benefits of environmental amenities. The method relies on the fact that real estate values capitalize the streams of costs and benefits including psychic costs and benefits that accrue to the property owner. There are many such streams and there are typically no markets for these streams or attributes in isolation from each other. It is the task of hedonic analysis to tease apart the values for these attributes. Regression analysis on a properly structured data set serves that purpose. If environmental attributes are among the independent variables, then the negative value of a marginal unit of pollution drops out of the exercise. One might multiply this value by some proposed, non-marginal decrement of pollution to derive the benefit of that decrement. Complications arise in doing so, however.

One virtue of the hedonic method is that it utilizes observation. As fraught with problems as any empirical effort necessarily is, one based on observation does not have the additional possible methodological problems of a study based on data not obtained by observation.

The 1979 report entitled Methods Development for Assessing Air Pollution Control Benefits Vol IV, Studies on Partial Equilibrium Approaches to Valuation of Environmental Amenities (EE0271D) is a collection of four papers. The second paper, "The Value of Learning About Consumption Hazards," by Robert A. Jones considers the effect of developing information about hazards associated with various forms of consumption. The investigator shows that such information of a negative value may be fully reflected in land values. Further, “if the possibly harmful effects of consuming a particular good depend on its accumulated consumption …, then the prospect of receiving information about the maximum safe level of consumption reduces current consumption ….”

The identification problem plagues certain hedonic price studies and may bias their results. It is an issue that arises when econometrics interacts with consumer preference theory. Exploring the Identification Problem in Hedonic Markets (EE0392) by McConnell and Phipps (1984) notes “the identification problem is essentially the problem of estimating parameters of structural equations from variations in marginal prices which are themselves computed from the estimated hedonic price equations.” In a simplified view of a comparable identification problem, it is difficult to estimate the parameters of a demand function if the observations result from movements of both the supply and demand functions. The investigators are skeptical that Rosen’s “two-step approach” constitutes a solution to this problem. They conclude that there are circumstances and methods that allow the problem to be solved. However, they consider the issue an open one and suggest further work.

The 1985 EPA study Identification of Preferences in Hedonic Models (EE-0004A) by Bockstael and McConnell is an attempt to refine the technique of hedonic analysis. The authors focus on a problem with the technique known as identification that had plagued previous studies. In their words, “the identification problem makes it more difficult to infer the benefits of non-marginal changes in housing attributes. Hedonic prices show what households would pay for small changes in housing traits, not their schedules of willingness to pay for various levels of the attributes.” Roughly, hedonic prices are just that, prices. They are values for a marginal unit. They are not demand functions or willingness to pay functions and it is these functions that are needed to value non-marginal changes in attributes.

The identification problem, although difficult, is not hopeless. First, errors from using hedonic prices to estimate the benefits of non-marginal changes may be less serious than errors from other sources. Second, it may be possible to solve the identification problem. One solution is to data from disparate markets and assume that housing demand is actually the same in all markets. However, the authors conclude that, “while it is conceptually possible to identify the hedonic model, it is not a good use of research resources.” They believe that other analytical tasks have priority.

The NSF/EPA-funded study from 1996, “Ecosystem Valuation: Policy Applications for the Patuxent Watershed Ecological-Economics Model” by Geoghegan deals with land use in the Patuxent (Md.) watershed. Non-point source water pollution is one environmental issue considered but development is the principal one. Preliminary results show that homeowners are willing to pay a premium to live near permanent open space as opposed to developable open space. Historical decisions of land-use change are modeled as functions of the expected returns and expected costs at each point in time from the conversion of land use from agricultural and forestry uses to residential development. These expectations will be a function of the value in original use, predicted value in residential use, and costs of conversion, which include regulatory costs.

EPA Research

EPA research that uses hedonic analysis to estimate the benefits of air quality improvement are described in a section entitled Hedonic: Air. A separate section deals with the application of the technique to hazardous waste and is entitled Hedonic: waste. You can see the full list of reports corresponding to this current section in the benefits analysis - valuation - revealed preference - property value subview of the subject view of the Environmental Economics Report Manager (EERM) database and the full list of corresponding NSF/EPA projects in the benefits analysis - valuation - revealed preference - property value subview of the subject view of the NSF/EPA Funding for Environmental Economics (FfEE) database.

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