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AEM 2500 2010 lec 22 Hedonics sv

AEM 2500 2010 lec 22 Hedonics sv - Hedonic Pricing In...

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Hedonic Pricing In making purchases or job decisions, people face tradeoffs (Mankiw’s Economic Principle #1 ) 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 jobs with lower health risks, . 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: site characteristics (S) such as square feet, age of house, or whether a garage is provided; location characteristics (L) such as commuting distance, density of l ti i d i t l lit h t i ti (E) population, or income; and environmental quality characteristics (E) such as air or water quality.
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