Academic journal article Agricultural and Resource Economics Review

An Hedonic Analysis of the Effects of Lake Water Clarity on New Hampshire Lakefront Properties

Academic journal article Agricultural and Resource Economics Review

An Hedonic Analysis of the Effects of Lake Water Clarity on New Hampshire Lakefront Properties

Article excerpt

Policy makers often face the problem of evaluating how water quality affects a region's economic well-being. Using water clarity as a measure of the degree of eutrophication levels (as a lake becomes inundated with nutrients, water clarity decreases markedly), analysis is performed on sales data collected over a six-year period. Our results indicate that water clarity has a significant effect on prices paid for residential properties. Effects of a one-meter change in clarity on property value are also estimated for an average lake in four real estate market areas in New Hampshire, with effects differing substantially by area. Our findings provide state and local policy makers a measure of the cost of water quality degradation as measured by changes in water clarity, and demonstrate that protecting water quality may have a positive effect on property tax revenues.

Key Words: eutrophication, hedonics, water clarity, water quality

Between 1986 and 1996, the number of eutrophic lakes (those with high nutrient levels) in New England doubled to 32% (U.S. Environmental Protection Agency, 1997). Fully 23% of New Hampshire's lakes have reached the eutrophic stage. It is estimated that cultural eutrophication, due to nonpointsource pollution from humans, has increased the rate of eutrophication, with the change in some of New Hampshire's lakes in the last 50 years equivalent to what took place over the previous 10,000 years (Schloss, 1999). Eutrophication leads to increased photosynthetic activity, causing algal growth, which can decrease the recreational and aesthetic benefits of the water body (Michael, Boyle, and Bouchard, 2000).

Benefit measures of reducing nonpoint-source pollution can serve two purposes: one is in benefitcost analyses of lake protection programs, and the second is to demonstrate to owners of lakefront properties that it is in their own interest to take actions to protect lakes from eutrophication. Using the hedonic method, this study assesses how water clarity affects sale prices of lakefront properties-- adopting procedures identical to those of similar studies examining properties in Maine (Michael, Boyle, and Bouchard, 2000; Boyle, Poor, and Taylor, 1999).

Despite the similarity in study methodologies, however, we do not expect similar results. New Hampshire lakes are closer to major metropolitan areas such as Boston and New York, and, in contrast to Maine, New Hampshire enjoys a more developed highway system. Further, the shorelines of Maine's lakes are substantially less developed than those of New Hampshire. Finally, Maine's lakes tend to be considerably larger on average than their New Hampshire counterparts.

The noticeable differences of the lakefront housing markets between the two adjacent states provide opportunities to test the basic hypothesis that water quality (as measured by the proxy of water clarity) is indirectly related to housing prices, and to examine if the effects of water quality on housing markets are affected by market conditions.

Previous Studies

Only a few studies have been conducted on water quality and its effects on property value. Due to the public-goods nature of water bodies, their (mis)use is difficult to monitor. Epp and Al-Ani (1979) estimated the relationship between the value of residential properties adjacent to streams and the quality of the water in the streams. The final model used pH as the environmental variable because it was the most commonly understood measure of quality to the homeowners. When the "clean" streams were estimated as a separate group, the results showed pH had a significant positive effect while the polluted streams were unaffected by pH changes.

Wilman (1984), in her work on coastal pollution, used market data on property rentals to discover the cost of beach pollution. The rental price equation included variables for distance from the beach and debris, and a proxy for pollution, along with structural and neighborhood characteristics. …

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