Revealed preference techniques

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Revealed preference techniques

• Dr John Tisdell

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Revealed preference techniques

• Hedonic pricing
• Travel cost
• Cost of replacement

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Hedonic Pricing
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Hedonic methods (HM)

• Introduction
• The theoretical model
• Data requirements
• Problems

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Introduction

• Derived from consumer theory, the HPM relies on
  the proposition that an individuals utility for
  a good or service is based on the attributes that
  good or service possesses, and that the utility
  of the attributes can be measured separately.

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• In the absence of a direct market, and price, for
  environmental quality, the value of the latter is
  derived from the prices of surrogate goods, the
  most common of which is labour and property.

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• The property value approach (PV) consists of
  observing systematic differences in the values of
  properties between locations, and isolating the
  effect of ambient environmental quality on those
  values.

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• The prices of houses differ for a number of
  reasons if all the major explanatory variables
  can be statistically controlled, the residual can
  be taken as a proxy for an environmental
  attribute. Under certain conditions, changes in
  this value can be regarded a willingness to pay
  for environmental quality.

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Non Linear Relationship
Property Value
Environmental Quality
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Consumers Willingness to Pay for Environmental
Quality
Change in property value (WTP)
c
E0
wo
E1
w1
d
EQ1
EQ2
Adapted from Peace and Markandya (1989).
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The hedonic pricing model

• TechniqueMultiple regression analysis is used to
  determine how much of the observed differences in
  property values are due to differences in their
  environmental quality.
• Value f(
• structural characteristics, (no of bedrooms, age
  of dwelling etc.)
• socio-economic characteristics, (income, age,
  number of children, distance to CBD, etc.)
• environmental attributes (distance to
  environmental attribute, green coverage, level
  of noise pollution etc.))

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Functional Form

• The relationship between the value of a property
  and its attributes is not always linear. The
  commonly explored functional forms are
• 1. Linear y a b .X
• 2. Log Linear log(y) a b. X
• 3. Negative exponential y a b .log(X)
• 4. Double log log(y) a b.log(X)

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Data requirements and problems

• The data requirements for hedonic pricing are
  quite large.
• HPMs require data on all the principle features
  of the property influencing their values,
  including such intangible qualities as
  neighbourhood characteristics and prestige,
  and relevant socio-economic data on the
  households involved - such as income, family
  size, social class, etc.
• The environmental variables also need to be
  specified and calibrated.
• (e.g. for the degree of air or noise pollution).

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Data Problems

• Measurement error
• Multicollinearity
• Awareness

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Measurement error

• Choice of variables
• Measure of environmental attribute
• Data reliability marginality.

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Multicollinearity

• Correlation between independent variables.
• Frequently associated with structural
  characteristics.
• Correlation matrix of independent variables
• Solutions
• Form aggregate variables, increase the date set.

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Awareness

• The HPM will only measure what people are aware
  of. For example, air pollution is not
  necessarily visible, therefore its impact on
  property values will only be detected in hedonic
  prices only if it is advertised or well known
  about (Mendelsohn et al., 1988).

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Other types of hedonic pricing models

• Wage based models
• Often used to value poor working environments
  heat, pollution, risk of injury.
• Like housing, wage differentials are assumed to
  depend on a number of factors including age,
  skills, education and location among others.
• By controlling for these, the residual premium (
  or discount in the case of a pleasant
  environment) is derived, and represents the extra
  wage needed to compensate workers for incurring
  environmental risk.

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• Overall, Pearce and Markandya, 1989, p.30 stated
  that
• PV is particularly well suited to estimating
  the costs of air and noise pollution on the
  residential environment but it works poorly if
  the form of pollution is one whose effects are
  unclear to the individuals affected and which
  cannot be easily measured or quantified.

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Examples

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• Prominent studies of urban amenity include Lake
  et al. (1998) who attempted to value the noise
  and visual intrusion of road development
• Geoghagan (1997) who attempted to evaluate the
  impact of surrounding land uses including
  diversity and fragmentation
• McLeod (1984) who attempted to value the impact
  of proximity to rivers, parks, highways

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• Pompe (1995) who attempted to value the impact of
  aircraft noise, road traffic, planned road
  widening and railway noise. Applications of the
  hedonic pricing technique to woodland and open
  space in rural areas include
• Garrod et al. (1992) who valued proximity to
  woodland, marshland and open water
• Correll et al. (1979) who valued proximity to
  greenbelts

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• Garrod et al., (1992b) who valued the amenity of
  forestry including the impact of forest type and
  
• Tyrväinen (1997) who estimated the effect of
  urban forests on property prices.

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Case Study REMINANT BUSHLAND IN BRISBANE

• Hedonic pricing study Simon Hill (hons).
• The hypotheses of this study are
• 1. that average property values reflect peoples
  willingness to pay to live in a neighbourhood
  characterised by more bushland cover and that
  property value is higher in such neighbourhoods
  
• 2. that property values reflect peoples
  willingness to pay to live within easy access to
  bushland and that property prices decrease as the
  access distance to bushland increases and
• 3. that property values reflect peoples
  willingness to pay to live adjacent to bushland
  and that property values increase with proximity
  to bushland.

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Case Study 1. THE VALUE OF BUSHLAND IN THE
BRISBANE CITY LOCAL GOVERNMENT AREA (LGA)
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Types of Remnant Bushland

• The City has four major bushland types
• Rainforest,
• Melaleuca,
• Eucalypt forest with heath understorey, and
• Eucalypt forest with grass understorey.

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Model and Variable Specification

• Review of literature
• In general, hedonic studies normally involve
• a number of structural variables (eg. number of
  rooms),
• a number of neighbourhood variables (eg. weekly
  income),
• a number of accessibility variables (eg. distance
  to the central business district) and
• environmental variables (eg. distance to remnant
  bushland) (Pearce et al, 1990 Pearce et al.,,
  1989 Lake et al., 1998, Abelson 1979, Mcleod,
  1984).

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Results for the Brisbane City LGA Case Study
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Case Study 2. TOOHEY FOREST CASE STUDY
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Findings

• The South East Freeway, Toohey Road, Kessels
  Road, Mains Road, Orange Grove Road and Logan
  Road all either border the forest, dissect the
  forest or impact negatively on the neighbourhoods
  that adjoin the forest.
• The benefits of living in proximity to Toohey
  Forest are only identifiable once the influence
  of roads is controlled for.
• This paper has indicates that the negative
  effect of roads in the study area is overriding
  the benefits associated with the presence of
  remnant bushland.