Question

You want to protect your cats, Elsa and Mr. Periwinkle (pictured below), from birds while they are outdoors hunting. I want to use the hedonic pricing method to infer your willingness to pay for a safer environment for your cats from the price you paid for the helmets they are wearing.

Describe the information I need to collect to estimate the willingness to pay for a safer environment for your cats using this method. Remember that this method is based on specifying the variables of a regression equation - I need a very complete specification of this equation. Please explain the variables that would affect the willingness to pay to increase environmental safety, referring to the helmets.

Answer 1

Hedonic pricing is a model that identifies price factors accoding to the premise that price is determined both by internal characteristics of the good being sold and external factors affecting it. A hedonic pricing model is often used to estimate quantitative values for environmental or ecosystem services that directly affect market prices for homes. This method of expertise and model specification, following a period of data collection.

KEY TAKEAWAYS

• Hedonic pricing identifies the factors and characteristics that affect an item,s price.
• Hedonic pricing is most often seen in the housing market, wherein the price of a piece of real estate is determined by the characteristics of the property itself.
• Hedonic pricing only captures a consumer's willingness to pay for what they perceive are environmental differences.

Understanding Hedonic Pricing

The most common example of the hedonic pricing method is in the housing, wherein the price of a building of piece of land is determined by the characteristiucs of the property itself ( e.g.,its size, appearance,fixtures, and condition), as well as characteristics of its surrounding environment ( e.g., if the neighborhood has a high crime and/or is accessible to schools and a downtown area, the level of water and air pollution, or the value of other homes close by).

The hedonic pricing model is used to estimate the extent to which each factor affects the price of the home. When running discrepancies in price will represent differences in good's external surroundings. With regards to valuing properties, a hedonic pricing model is relatively straightforward as relies on actual market prices and comprehensive,available data sets.

Important: Hedonic pricing is used to determine the extent that enviromental or ecosystem factors affect the price of a good-usually a home.

Advantages and Disadvantages  of Hedonic Pricing

The hedonic pricing models has many advantages, including the ability to estimate values, based on concrete choices, particulary when applied to property markets with readily available, accurate data. At the same time, the method is flexible enough to be adapted to relaationships among other market gods andd external factors.

Hedonic pricing also has significant drawbacks, including its ability to only capture consumers' willingness to pay for what they perceive are environmental differences and their resulting consequences. For example, if potential buyers and not aware of a contaminated water supply or impending early morning construction next door, the price of the property in question will not change accordingly. Hedonic pricing also does not always incorporate external factors or regulations, such as taxes and interest rates, which could also have a significant impact on prices.

Example of Hedonic Pricing

Consider home prices, which are an easy way t value certain environment aspects. For example, a home close to parks or schools may sell for a premium. Meanwhile, a home right on a major highway may sell for less. Hedonic pricing uses regression to see which factors matter the most and each's relative importance.

For the home price example, the price of the home would be analyzed based on independent variables, such as distance from a park. With that, the result would appear something along the lines of, for every mile closer to a park the home value increases by $10000.

FAST FACT

Labor economist Sherwin Rosen first presented a theory of hedonic pricing in 1974 in a paper entitled "Hedonic Pricing and Implicit Market: Product Differentiation in pure Competition."