Hedonic pricing method
21st Dec 2018
Hedonic pricing method
Suitability for the forest ecosystem services to be valued:
Air and water pollution
Cultural services: aesthetic and recreational services
Description of the method:
Hedonic pricing method relies on market transactions for differentiated goods to estimate the economic benefits or costs associated with environmental quality. The basic premise of the hedonic pricing method is that the price of a marketed good is related to its characteristics, or the services it provides. It is based on the assumption that goods can be considered aggregates of different attributes, some of which, as they cannot be sold separately, do not have an individual price .
It utilizes information about the implicit demand for an environmental attribute of marketed commodities. For instance, houses or property in general consist of several attributes, some of which are environmental in nature, such as the proximity of a house to a forest or whether it has a view on a nice landscape. Hence, the value of a change in biodiversity or ecosystem services will be reflected in the change in the value of property (either built-up or land that is in a (semi-) natural state). By estimating a demand function for property, the analyst can infer the value of a change in the non-marketed environmental benefits generated by the environmental good.
Benefits of the method:
May be conducted with already existing data (no separate data collection costs)
Can be used to estimate values based on actual choices
Property markets are relatively efficient in responding to information, so can be good indications of value
The method is versatile, and can be adapted to consider several possible interactions between market goods and environmental quality
Property records are typically very reliable
Limitations of the method:
It can be applied only in presence of a good number of market exchanges, as the model representing the market requires a certain number of good quality data
The market must be sufficiently transparent
Scope of environmental benefits that can be measured is mainly limited to things that are related to housing prices, it is not possible to estimate the total economic value of the environmental good, but only the value connected to present and, with some caution, future uses
Only captures people’s willingness to pay for perceived differences in environmental attributes, and their direct consequences
Assumes that people have the opportunity to select the combination of features they prefer, given their income
Results depend heavily on model specification
Large amounts of data must be gathered and manipulated
Relatively complex to implement and interpret, requiring a high degree of statistical expertise
Time and expense to carry out an application depends on the availability and accessibility of data
The availability of reliable price records can be a major problem.
Case examples: