The amenity value of the climate: the household production function approach

Abstract

A basic assumption of the hedonic technique is that there are no barriers to mobility that prevent prices changing to reflect the net benefits of a given location. But climate variables are undeviating over relatively large distances and the absence of a common language coupled with the existence of political boundaries may prevent the net advantages associated with a particular region from being eliminated. Apart from in a handful of countries, methods alternative to the hedonic approach may therefore be required to estimate the amenity value of climate. Adopting the household production function approach this paper undertakes a systematic examination of the role played by climate in determining consumption patters using data from 88 different countries. Given certain assumptions the paper then proceeds to calculate the constant utility change in the cost of living for a 2.5 °C increase in globally averaged mean temperature. It is determined that high latitude countries benefit from limited climate change whereas low latitude countries suffer significant losses.