Topics Today 101408

1
Topics Today (10/14/08)

• Pollution, land prices, and wages.
• Hedonic pricing and amenities.
• Value of Statistical Life.
• HW 3 due today.

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Pollution, Land Prices, and Wages

• Observations
• Some communities are considered nicer to live
  in than others.
• Some communities with high pollution also have
  high wages.
• Q How do pollution, land markets, and labor
  markets interact?
• Premise environmental quality (or pollution
  specifically) is capitalized into land and labor
  markets.

3
Pollution, Land Prices, and Wages

• A simple model of two cities (A, B).
• Some notation
• w wage level.
• r land price.
• P pollution level.
• V(w, r, P) utility from consuming w, r, and P.
• C(w, r, P) firms average cost of producing good
  X.

Note there are supplemental notes for this model
available on the course website.
4
Pollution, Land Prices, and Wages

• A simple model of two cities (A, B).
• Some assumptions
• People can move freely from A to B.
• Each individual in A and B have same utility V(w,
  r, P) k.
• If PAltPB, then consumers in B must be compensated
  by either higher w or lower r.
• Average cost of producing X is the same for A and
  B.
• C(w, r, P) 1.
• If a firm pays higher w, then r must be lower to
  keep costs equal to 1.
• PAltPB.

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Pollution, Land Prices, and Wages

• Scenario 1 Pollution is productive for firms
  (higher P gt lower C).

v(w, r, PA) k
Land prices (r)
V(w, r, PB) k
C(w, r, PB) 1
C(w, r, PA) 1
Wages (w)
wA
wB
Results wA lt wB rA gtlt rB
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Pollution, Land Prices, and Wages

• Intuition (productive pollution)
• Higher P drives away labor, but attracts firms.
• Firms bid up wages to attract labor.
• Firms dont necessarily bid up land prices,
  because that would drive labor away.

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Pollution, Land Prices, and Wages

• Scenario 2 Pollution is unproductive for firms
  (higher P gt higher C).

v(w, r, PA) k
Land prices (r)
V(w, r, PB) k
rA
rB
C(w, r, PA) 1
C(w, r, PB) 1
Wages (w)
Results wA gtlt wB rA gt rB
8
Pollution, Land Prices, and Wages

• Intuition (unproductive pollution)
• Higher P drives away both labor and firms.
• How to attract labor and firms?
• Firms need lower w and / or lower r.
• Labor needs higher w and / or lower r.
• Land prices (r) get bid down to draw labor and
  firms back.

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Pollution, Land Prices, and Wages

• Scenario 3 Pollution is neutral for firms (P
  doesnt affect C).

v(w, r, PA) k
Land prices (r)
V(w, r, PB) k
rA
rB
C(w, r, PA) C(w, r, PB) 1
wA
wB
Wages (w)
Results wA lt wB rA gt rB
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Environment, Land Prices, and Wages

• Ex/ Sunshine, land prices, and wages in 3000
  U.S. counties (Nordhaus 1996).
• Sunshine is probably neutral in production.
• People generally prefer sunshine.

w
r
Sunshine index (c)
w is adjusted by cost-of-living
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Environment, Land Prices, and Wages

• Ex/ Sunshine, land prices, and wages in 3000
  U.S. counties (Nordhaus 1996).
• Results

w / r
2.5
0
U.S. Average
-2.5
0
-5
-10
5
10
Avg. Temp
U.S. Average
Nordhaus, W.D. 1996. Climate Amenities and
Global Warming. in N. Nakicenovic, W.D.
Nordhaus, R. Richels, and F.C. Toth (Eds.),
Climate Change Integrating Science, Economics,
and Policy, Proceedings of Conference at
International Institute of Applied Systems
Analysis, Laxenburg, Austria, IIASA Report
CP-96-1 (December).
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Hedonic Pricing Models Housing Market

• Ex/ What determines the value of a house?
• Site characteristics number of bedrooms, age of
  house, garage, etc.
• Neighborhood characteristics distance from
  downtown, distance from UW, etc.
• Environmental characteristics noise levels, air
  quality, scenic views, proximity to dis-amenities
  (i.e. landfills), etc.

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Hedonic Pricing Models

• Example/ Consider two houses which are identical
  in every way (i.e. same size, same age, etc.)
  except their distance to a town park.
• House A (1/4 mile from the park) sells for
  90,000.
• House B (1/2 mile from the park) sells for
  89,000.
• Value of moving an extra ¼ mile closer to the
  park is equal to 1000.
• Could we then infer that moving from 1/4 mile to
  right next to the park is also worth 1,000?
• Probably not.
• Diminishing marginal value.

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Hedonic Pricing Models

• Process of an HPM Study
• Collect data on house characteristics and prices.
• Use a regression to estimate the share of the
  housing price attributable to particular
  characteristics.
• Total House Price (A1 x Number of Square Feet)
  (A2 x of Bathrooms ) ( A10 x Air
  Quality).
• This is the method by which we control for all
  other attributes which may affect prices.

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Hedonic Pricing Models
Hedonic Prices
?P
Air Quality
Q1
Q2
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Hedonic Pricing Models

• Primary strength of HPM estimates based on
  observed behavior, not hypothetical scenario.
• Primary limitations of HPM
• Estimate use values only.
• Estimate values for landowners only.
• Main challenge with HPM omitted variable bias.
• Creating the all else equal experiment is
  challenging.
• Difficult to obtain data on all things that
  affect housing prices (e.g. scenery).
• Omitted variable bias occurs when unobserved
  factors that affect housing (e.g. scenery) are
  correlated with environmental quality variables
  of interest (e.g. pollution).

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Case Study I Hedonic Pricing Model of Shoreline
Property Values in WI

• Q What is the effect of an aquatic species
  invasion (Eurasian Watermilfoil) on shoreline
  property values?
• Data
• Approx. 1800 shoreline property transactions.
• 1997-2006.

Horsch, E.J., and D.J. Lewis. 2008. The Effects
of Aquatic Invasive Species on Property Values
Evidence from a Quasi-Random Experiment. Land
Economics (Forthcoming).
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Factors used to explain property prices include
Assessed value of structural improvements Year of
Sale Lot acreage Lot frontage Fishing
quality Distance to the nearest major town
(Minocqua-Woodruff or Eagle River) Lake size
(perimeter, acreage) Secchi depth Shoreline
development density Public access to lake
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Case Study I Hedonic Pricing Model of Shoreline
Property Values in WI

• Milfoil is spread by boaters.
• Boaters more likely to visit attractive lakes
  (e.g. nice scenery, good fishing, etc.).
• Attractive lakes have high property values.
• Dont have data on everything that makes a lake
  attractive.
• Omitted variable bias.

PM
PNM
time
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Case Study I Hedonic Pricing Model of Shoreline
Property Values in WI

• .

• A natural experiment can be used to alleviate
  omitted variable bias.
• ?P 30,000 per parcel (8 of property value).
• In annual terms, WTP to avoid a Milfoil
  infestation is 1,400.
• For an average lake WTP 187,600.

PM
PNM
?P
time
tM
tM year of Milfoil invasion. ?P drop in price
due to invasion.
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Case Study II Hedonic Pricing Model of PCB
contamination in MA

• Ex/ Estimating the damages from PCB contamination
  in New Bedford, MA.
• The presence of PCBs in the harbor was first made
  public in 1976.
• Gathered data on 780 single-family home sales
  between 1969 and 1988.
• The price decline due to PCBs
• 9000 for homes in the most hazardous area.
• 7000 for homes in less hazardous areas.

Mendelsohn, R., D. Hellerstein, M. Huguenin, R.
Unsworth, and R. Brazee. "Measuring Hazardous
Waste Damages With Panel Models", J. of
Environmental Economics and Management 22 (1992)
259-271.
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Case Study II Hedonic Pricing Model of PCB
contamination in MA

• Ex/ PCB damages (Cont.)
• Multiplying the price decline estimates by the
  number of homes affected, the estimated damages
  from PCB contamination was 36 million.
• Based on these and other results, the firms
  responsible have paid out over 20 million in
  natural resource damage claims.