Academic journal article Journal of Real Estate Literature

A Survey of House Price Hedonic Studies of the Impact of Environmental Externalities

Academic journal article Journal of Real Estate Literature

A Survey of House Price Hedonic Studies of the Impact of Environmental Externalities

Article excerpt

Abstract

This article reviews existing studies that have used the house price hedonic technique to estimate the prices that consumers are willing to pay for environmental goods such as air quality, water quality, and distance from toxic or potentially toxic sites. We examine whether the results obtained are consistent over the studies, if the estimated prices change over time and what role changes in information play in consumers' behavior. We also discuss what housing and neighborhood variables are included. Finally, we focus on those studies that have included more than one environmental good to see whether multiple measures yield different results.

Introduction

When forming environmental policy, decision makers would like to know as much as possible about the supply of and demand for the environmental goods under consideration. While engineers can inform them about the cost of obtaining various levels of environmental quality, obtaining demand curves requires knowledge of the prices that consumers are willing to pay for the good. With marketed goods, such prices are observable. However, since environmental goods are, by their nature, nonmarketed, researchers must use other techniques to obtain the prices.

One such technique is hedonic estimation. This technique assumes that when consumers purchase some marketed good, they are implicitly also buying some environmental good (or goods). For example, when a house is purchased the buyer receives the house, its neighborhood and its environmental characteristics. By regressing the characteristics of the purchased good, including the environmental characteristics, on the observed price of the purchased good, one can extract the contribution of the environmental good to the price of the marketed good.

Studies have used this technique to estimate the prices that consumers are willing to pay for environmental goods such as air quality, water quality and distance from toxic or potentially toxic sites. Several articles have looked at the literature concerning a specific environmental good, in order to see what variables affect the prices [e.g., Smith and Huang (1993, 1995) used meta-analysis to study air quality hedonic results] or to look for consistency in the results [e.g., Farber (1998) who examined hedonic studies on undesirable land uses]. This review proposes to examine the studies considered in these previous efforts as well as others in order to address several unanswered questions. First, are the results consistent over studies of the price of various pollutants? Second, what dynamics are important in the models? Do prices change over time? And what role do changes in information play in the consumer's behavior? Third, what housing and neighborhood variables are included in these studies? Controlling for all characteristics that affect house price is important, especially if environmental goods are correlated with these other characteristics. Fourth, most previous studies have included only one variable to control for the environmental good. We will examine what those variables are, and whether multiple measures yield different results. Finally, only a few studies have included measures of more than one environmental good (e.g., Blomquist, Berger and Hoehn, 1988; Thayer, Albers and Rahmatian, 1992; and Clark and Nieves, 1994), although environmental equity studies (e.g., Been, 1993) suggest that such externalities are highly correlated with each other. When estimating such models, it is important to know whether the included and/or excluded variables are correlated with other variables.

We will present the hedonic studies grouped by media and then by the time at which the study was published. We also provide exhibits that summarize the information contained in each study and convert the dollar values of prices to constant dollars using the Bureau of Labor Statistics' Consumer Price Index for all items and all urban consumers. …

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