Question

In your own words, explain how hedonic regressions are used to price environmental goods. You don’t need to get into the technical details, just give a conceptual overview of what this technique accomplishes and how. A paragraph description is sufficient. Also, what is one of the ways in which this technique might be misused (i.e., what is a key assumption that is required for hedonic regression to produce good results, but that might be violated in practice – say, by an analyst who has not carefully considered the potential problems of using hedonic pricing in their context, and whose results might thus be deemed too unreliable to include in your meta-analysis)?

Answer 1

Environmental goods are type of public goods- available for use of everyone, without paying any direct cost for their usage. These are non-market goods luke, clean air, clean water, cycleways, clean roads, pollution free air, greeneries, gardens, clean beaches, mountains, etc. Their existence is necessary for human and environmental well-being. However, there is no direct cost for this, but everyone has to contribute in some ways or other in order to have that. There are unique ways of pricing them because it involves cost in creating and maintaining such goods. It is difficult to assign economic values to these things due to the following reasons:

• Free riding
• Assigning ownership
• Non- divisibility of these goods.

Willingness to pay is one of the method in which these goods can be priced. Another way developed by environmental economists is hedonic regression pricing. It is basically a revealed preference theory of assigning or estimating values. Hedonic pricing model identifies price factors which inturn are based on internal and external characteristics of the goods being sold. It involves core statistical analysis of all characteristics of factors which made up the good in concern. For example- in calculating price of an environmental good, hedonic pricing method will consider all the factors affecting that good.... Like clean air: how many factories are there nearby the place in concern, what is the traffic pollution in that area, are there any particular industries or activities hampering the air cleanliness level, etc.... All these factors will be priced. It will involve calculation of many things and activities going around and a specific time period data will be required. This is one huge drawback of this method.