Hedonic approach vs user frequency, which is better?

The paper, Recreational and Resource Economic Values for the Peconic Estuary System, by James J. Opalueh, Thomas Grigalunas, Jerry Diamantides, Marisa Mazzotta, and Robert Johnston was written in 1999 as a study of the value of the Peconic Estuary system on the eastern end of Long Island. They used four methods to estimate value, but let’s compare just the first two: the hedonic pricing method using home values as the dependent variable, and a travel cost study. Here’s their introduction:

I.B. 1. Introduction and Overview


No single method can capture the value of the variety of services provided by the natural assets of the PES. Recognizing the many uses of PES natural resources, we designed and implemented a suite of four non-market valuation studies in order to provide estimates of the value of particular services:


(1) A Property Value study examines the contribution of environmental amenities to the market price of property. Using the Town of Southold as a case study, the Property Value study was designed to measure values of amenities to residents living in the immediate vicinity.


(2) A Travel Cost study uses original survey results to estimate outdoor recreational uses in the PES and the economic value that users have for four, key PES outdoor recreation activities: swimming, boating, fishing, and bird and wildlife viewing. This study also examines the impact that (A) water quality has on the number of trips and the value of swimming and (B) the effect of the catch rate on recreational fishing, important recreational uses of the estuary and activities much affected by water quality and resource abundance.

page 11.

Now this report looks at a fairly significant natural amenity, but isn’t the idea that residents place value on any public open space going to be subject to the same analysis? Whether a park with playground equipment, a lake with a swimming beach or a ravine with hiking trails; all these open spaces are valued both by homeowners who live in close proximity as well as others who come just for a visit.

The first approach the authors use to estimate a value of the public amenity is to calculate the portion of the home sale prices which can be attributed to the proximity of the natural resource. The idea behind the process is, if you could have exactly the same home, how would the value of the home change as it moved away (or toward) the public amenity.

We apply economic methods using the property value (or “hedonic” method) to a database comprised of all Southold real estate transactions in 1996 and GIS parcel coverage data for the town. Briefly, the analysis estimates correlations between property values and levels of valued environmental attributes, including open space.

page 27

Here is a further explanation on how the regression model works:

The Property Value technique is based on the assumption that a relationship exists between the market value of a property, and the characteristics of the property. The Property Value method uses a statistical technique called “multiple regression” to assess the impact of each characteristic on the market value of the property. The technique simultaneously compares a large number of properties with different prices and different levels of each characteristic. The method establishes which characteristics are associated with higher values, which are associated with lower values, and which have no significant impact on values. The model also estimates the dollar magnitude of these impacts–that is, it estimates how large an impact is likely to be caused by a specific level of a specific characteristic. Using this technique, the impact of different environmental amenities on nearby property values can be estimated.4 The technical details of the property value model (or hedonic technique) are presented in Appendix A.

page 16

Please read further through their paper for the statistical details, but what I would like to focus on is the equity, or capital, which is captured in each home due to its association with a public amenity. Buyers and sellers in a well functioning marketplace are bidding on the homes and thus determining what the market will bare for this infrastructure (not sure why it is considered a non-market approach). There is a premium in the offer price for greater access, hence they are pricing out the desirability of the public good.

In addition to what the authors derive as dollar figures for the market value retained by residential properties, they also note that there is value to people who use the estuary from a distance. This value is derived by a second process in step two. It is done by estimating number of visits, or trips made to use the open space. In a sense it is a user fee estimation.

I think they go awry by shifting from a capital perspective to a user perspective. We pay our water bills on a user based system but that does not represent the value of having the pipes in place to pump fresh water to all residents. And certainly metro user fees do not equate with the cost of installing mass transit. Analyzing visits more appropriately syncs with management issues such as how many lifeguards to have on duty, how often the trash bins need to be emptied and so on.

I offer a platter perspective for the inclusion of the value to the greater public who use the estuary. The residents adjacent to the estuary, who enjoy a view over an open space and a walking trail out their back yard, enjoy one level of access. The group of people who live in the local town have another relationship. And people who visit from across the county may derive yet another coefficient in front of the data which represents access to natural amenities within their reach.

At each level exists in an eco system- or platter– and a data set representative of the value of these public goods.

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