10 Questions
What does the price paid for a house depend on according to the text?
Both the quantity/quality of the environmental attribute and socio-economic characteristics of the households
How is net benefits measured for localized changes in amenities?
Change in sales price
What does Rosen's model focus on in terms of residential properties?
Utility function for buyers
Which characteristic is not included in Rosen's model's utility function?
Personal income
How is change in house prices assumed to relate to the characteristics of houses?
Unknown relationship
In Rosen's model, what does 'm' represent in the budget constraint equation?
Income
What factors are considered in determining net benefits for non-localized changes in amenities?
Second-stage demand analysis
What is used to compute net benefits if there are transactions costs associated with moving between properties?
Change in price net of transaction costs
What does the consumer surplus calculation involve according to the text?
Calculating excess benefits received by consumers
What determines the cost of houses according to the text?
A non-linear relationship with house characteristics
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
Learn about the application of the hedonic pricing method in environmental economics, where the value of environmental characteristics of residential properties is assessed based on price differences. This method helps in determining the willingness to pay for different levels of environmental quality.
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