An Extension of the Hedonic Approach for Estimating the Value of Quiet

Abstract

There is no explicit market through which environmental amenities (and disamenities) can be evaluated, because of their public-good nature. Consequently, those interested in estimating the benefits obtained from environmental amenities such as parkland, pollution-free air, and freedom from noise have sought to derive these estimates indirectly. A popular but controversial method has been to relate the degree of environmental amenity to property value. Typical of that approach is the Ridker and Henning utilization of the hedonic regression technique relating, for census tracts in St. Louis, average home values to home and neighbourhood characteristics including air sulfation levels to determine an implicit price for pollution-free air.1 Ridker and Henning use this implicit price to estimate willingness to pay for an overall reduction of air pollution in St. Louis. It is this extension which has been challenged. Freeman (1971) argues that it is inappropriate to use the marginal prices derived from hedonic regressions to estimate the willingness to pay for a nonmarginal change in the environment. This is because the regression coefficient does not measure marginal willingness to pay but rather reflects the market equilibrating price or opportunity locus in a particular supply-demand situation.2 If the benefits of environmental improvements are to be measured from changes in property values, a general equilibrium model of land rents is required. The subsequent debate3 revealed that such estimates of willingness to pay for nonmarginal changes of the environment are valid only if rents fully extract all surpluses.4 Polinsky and Shavell (1976) demonstrate that under rather restrictive assumptions this condition may indeed be met if the area affected is small (in which case the property value at location i depends only on amenities at i) and open (that is, there is full mobility). In that case competitive bidding by households for preferred locations will result in land prices fully reflecting the value of the differences in environmental quality. In efforts to overcome the deficiencies noted above, researchers have followed the suggestions of Freeman (1975) and Rosen (1974) and used the hedonically estimated prices as inputs into a second stage regression designed, usually through the inclusion of household characteristics including income, to better estimate the true marginal willingness to pay schedule. Thus, for example, Harrison and Rubinfeld (1978a), determine