Department of Agricultural and Resource Economics
University of California, Berkeley
Solutions to Problem set 4
Hedonic prices, see Chapter 9, pp6-8.
We hypothesize that house price depends on the three housing characteristics in the
House price = n + n1*(view) + n2*(indoor space) + n3*(outdoor space), thus we can
write a system of four equations:
300000 = n + n1*0 + n2*1000 + n3*2000
500000 = n + n1*0 + n2*1500 + n3*7000
360000 = n + n1*1 + n2*1800 + n3*2000
600000 = n + n1*1 + n2*1200 + n3*5000
Solve and yield n = 380000, n1 = 220000, n2 = -200, n3 = 60.
The implicit value of indoor space is $-200/square feet, the implicit price of outdoor
space is $60/square feet, and the implicit price of having a view is $220,000.
The projected price of a house with indoor space of 1000sf and outdoor space of
1,500sf and without view is $270,000, and the projected price of such house with a
view is $490,000, thus the gain from a view is $220,000.
(Chapter 9, p4) WTP is the maximum amount of money an individual would give up
in exchange for the benefits of the environmental amenity.
It can be measured by the
area under the individual’s demand curve, which is bounded by the individual’s
WTA is the minimum total amount of money an individual would accept to
forego all the benefits associated with the environmental amenity.
WTA is not
bounded by the individual’s budget constraint, therefore is generally greater than
(Chapter 9, pp9-11) Contingent valuation is a technique that allows the estimation of
the value people attach to a environmental amenity by directly asking their WTP or
their WTA a compensation. CV has been widely used in estimating non-market
value, however, like many other interviewing techniques, it has its own weaknesses.