23 - Hedonic Pricing In making purchases or job decisions,...

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Hedonic Pricing • In making purchases or job decisions, people face tradeoffs. (Mankiw’s Economic Principle #1.) – Housing: more rooms, more baths, air conditioning, etc. – Jobs: working conditions, location, hours, etc. • One of the factors people may consider in making decisions is the level of pollution or health risks. – This may result in paying higher prices for houses in non- polluted areas than in polluted areas, ceteris paribus . – Requiring higher wages for jobs with higher health risks than jobs with lower health risks, ceteris paribus . • Hedonic: economists seek observable monetary aspects of satisfaction associated with market decisions.
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Hedonic Price Function for Property Values The hedonic pricing approach derives from the characteristics theory of value first proposed by Lancaster (1966), although the concept can be traced back to Court (1941). This seeks to explain the value of a commodity as a bundle of valuable characteristics. One or more of these characteristics may be environmental. Ridker and Henning (1967) first applied method to environmental valuation in a study of the effect of air pollution on property values in St. Louis. By finding a negative relationship between property values and sulfate measures, this study motivated the conceptual model of Rosen (1974) of how we might use hedonic prices to estimate peoples’ values for site-specific amenities. – House prices within a city might depend upon: structural characteristics such as square feet, age of house, or whether a garage is provided; locational characteristics such as commuting distance, density of population, or school quality; and environmental quality variables such as air or water quality.
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Residential Property Value Loss and Distance from Woburn Superfund Site 0 10000 20000 30000 40000 50000 60000 70000 0123456 Miles from Woburn Superfund Site Dollars (Residential Property Loss Based on $200,000 Avg Home Price) Messer et al. 2006 Higher Estimate Kiel and Zabel 2001 Lower Estimate Source: Messer et al. Env. and Res. Econ. 2006 Kiel and Zabel Journal of Real Estate Finance and Economics 2001
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Imagine the following hypothetical scenario in which there are two identical lakes each with 100 identical homes surrounding them. All homes are lakefront, and all the characteristics of the homes
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23 - Hedonic Pricing In making purchases or job decisions,...

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