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Questions and Answers
What does the price paid for a house depend on according to the text?
What does the price paid for a house depend on according to the text?
- Only the quantity and quality of the environmental attribute
- The number of rooms in the house
- Socio-economic characteristics of the households only
- Both the quantity/quality of the environmental attribute and socio-economic characteristics of the households (correct)
How is net benefits measured for localized changes in amenities?
How is net benefits measured for localized changes in amenities?
- Consumer surplus calculation
- Change in sales price (correct)
- Integration of the implicit demand curve
- Change in sales price net of transaction costs
What does Rosen's model focus on in terms of residential properties?
What does Rosen's model focus on in terms of residential properties?
- Second-stage demand analysis
- Budget constraints
- Utility function for buyers (correct)
- Integration of demand curves
Which characteristic is not included in Rosen's model's utility function?
Which characteristic is not included in Rosen's model's utility function?
How is change in house prices assumed to relate to the characteristics of houses?
How is change in house prices assumed to relate to the characteristics of houses?
In Rosen's model, what does 'm' represent in the budget constraint equation?
In Rosen's model, what does 'm' represent in the budget constraint equation?
What factors are considered in determining net benefits for non-localized changes in amenities?
What factors are considered in determining net benefits for non-localized changes in amenities?
What is used to compute net benefits if there are transactions costs associated with moving between properties?
What is used to compute net benefits if there are transactions costs associated with moving between properties?
What does the consumer surplus calculation involve according to the text?
What does the consumer surplus calculation involve according to the text?
What determines the cost of houses according to the text?
What determines the cost of houses according to the text?
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Study Notes
Hedonic Pricing Method
- Applies to environmental characteristics of residential properties
- Price difference between houses with different levels of environmental quality reflects WTP for environmental quality
- Variation in environmental quality affects house price
Factors Affecting House Purchase
- Physical characteristics: number of rooms, bathrooms, central heating, age and condition of structure, etc.
- Accessibility characteristics: access to major centres of employment, shops, etc.
- Public sector characteristics: accessibility to schools, post office, etc., local tax rates, etc.
- Neighbourhood and environmental characteristics: aspect, view, tree cover, road traffic, water frontage, etc.
- Alternative use characteristics: land with planning permission for a higher value use, etc.
Welfare Measurement with Hedonic Price Function
- Change in localized amenity affects a large number of houses, causing a shift in supply and a change in market equilibrium
- Decrease in amenity: renters face no change in welfare, owners realize a capital loss on the property
- Total WTP: sum of implicit prices across property owners that receive a change in the amenity
Example: Hedonic Price Model with Housing Attributes
- Environmental disamenity: nitrogen reading in well water
- Houses part of suburban housing market of Baltimore, Maryland
- Dependent variable: Sales price, independent variables: house attributes, neighborhood attributes, scores of third-grade students
- Variables: PRICE, TIMETREND, NUMBED, FULLBATH, LIVAREA, LOTSIZE, DIST, SCORE, NITRATES, HALFBATH, POOLIN, HEATPUMP, PUBSEW, CARROL, HOWARD, BALTO
Welfare Measurement Example
- Linear Model and Semi-log Model estimates
- Estimation of implicit inverse demand function of environmental attribute
- Calculation of consumer surplus: integration of implicit demand curve between former and new levels of environmental quality/quantity
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