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Revealed preference techniques

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Title: Revealed preference techniques


1
Revealed preference techniques
  • Dr John Tisdell

2
Revealed preference techniques
  • Hedonic pricing
  • Travel cost
  • Cost of replacement

3
Hedonic Pricing
4
Hedonic methods (HM)
  • Introduction
  • The theoretical model
  • Data requirements
  • Problems

5
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.

6
  • 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.

7
  • 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.

8
  • 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.

9

Non Linear Relationship
Property Value
Environmental Quality
10
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).
11

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.))

12
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)

13
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).

14
Data Problems
  • Measurement error
  • Multicollinearity
  • Awareness

15
Measurement error
  • Choice of variables
  • Measure of environmental attribute
  • Data reliability marginality.

16
Multicollinearity
  • Correlation between independent variables.
  • Frequently associated with structural
    characteristics.
  • Correlation matrix of independent variables
  • Solutions
  • Form aggregate variables, increase the date set.

17
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).

18
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.

19
  • 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.

20
Examples

21
 
  • 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

22
  • 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

23
  • 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.

24
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.

25
Case Study 1. THE VALUE OF BUSHLAND IN THE
BRISBANE CITY LOCAL GOVERNMENT AREA (LGA)
26
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27
Types of Remnant Bushland
  • The City has four major bushland types
  • Rainforest,
  • Melaleuca,
  • Eucalypt forest with heath understorey, and
  • Eucalypt forest with grass understorey.

28
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).

29
Results for the Brisbane City LGA Case Study
30
Case Study 2. TOOHEY FOREST CASE STUDY
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34
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.
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