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Demand for Amenities and Cost of Regulation: Methods and Applications

Paper Session

Friday, Jan. 6, 2017 1:00 PM – 3:00 PM

Swissotel Chicago, Zurich G
Hosted By: Association of Environmental and Resource Economists
  • Chair: Alvin Murphy, Arizona State University

Do Land Markets Anticipate Regulatory Change? Evidence From Canadian Conservation Policy

Branko Boskovic
,
University of Alberta
Linda Nostbakken
,
Norwegian School of Economics

Abstract

This paper examines the effect of current and anticipated regulation on land values.<br /><br />
Precise regulatory boundaries allow one to identify the cost of land use regulation<br /><br />
by comparing land prices on either side of the borders. If borders may change in<br /><br />
the future, the expected cost of future regulation will also be capitalized into land<br /><br />
values, confounding identification of the cost of existing regulation. We develop a<br /><br />
framework to identify both the cost of current and anticipated regulation. Using a panel<br /><br />
dataset on auction prices for oil leases and land use regulations aimed at protecting<br /><br />
the environment, we can account for where regulation is currently imposed and where<br /><br />
it is plausibly anticipated in the future. We find that, relative to leases that will<br /><br />
never face regulation, the auction price of regulated leases is 30% lower on average,<br /><br />
while the price of leases not yet regulated is 16% lower on average. Based on our<br /><br />
estimates, we calculate the total cost of the regulation to be more than $1.5 billion for<br /><br />
leases auctioned between 2003 and 2012. Failing to account for anticipated regulation<br /><br />
underestimates this cost by 29%.

Estimating Heterogeneous Preferences to Avoid Flood Risk and the Implications for Disaster Exposure

Lala Ma
,
University of Kentucky
Laura Bakkensen
,
University of Arizona

Abstract

Flooding remains one of the costliest natural disasters in the US. With these risks spread heterogeneously across space, key policy questions arise regarding how Marginal Willingness to Pay (MWTP)to avoid flood risk varies. In this paper, we estimate household preferences to avoid flood risk in the presence of heterogeneous sorting using house sales across Florida from 1998 to 2012. We begin by using variation across flood risk zones, delineated by the National Flood Insurance Program (NFIP), to estimate MWTP from a hedonic property value model that identifies preferences to avoid such risks using a boundary discontinuity design (BDD). Upon merging house sales with race and income information of the homebuyer, collected under the Home Mortgage Disclosure Act, we examine whether sorting induces correlations between neighborhood flood risk and individual sociodemographics. We then use a discrete choice, residential sorting model that embeds the BDD to estimate heterogeneous preferences for neighborhood attributes (e.g. flood risk). Understanding heterogeneity in preferences for such risks is key to assessing the extent to which vulnerable sub-­‐populations systematically sort into higher risk areas. Structural preference parameters recovered from the sorting model allow us to predict changes in the distribution of household types across flood risk, had a (counterfactual) change in flood risk (e.g. from re-zoning or revisions to NFIP flood boundary maps) taken place. In addition to providing new valuation estimates for flood risk, our results have implications for the distributional impacts of US natural hazards policies and its potential role in exacerbating inequitable flood risk exposure in the US.

Using Residential Sorting Behavior to Better Understand the Relationship between Urban Greenspace and Health

Austin Williams
,
University of Wisconsin-Madison
Dominic Parker
,
University of Wisconsin-Madison
Daniel Phaneuf
,
University of Wisconsin-Madison

Abstract

A recent wave of research in public health finds associations between the proximity of an individual to greenspace and various health outcomes, including obesity, cardiovascular disease rates, depression, and anxiety. Based on these associations, it is sometimes assumed that better access to parks will lead to improved health outcomes. Our project addresses this assumption by focusing on an issue sometimes ignored in this literature: people sort themselves into neighborhoods based on the characteristics of those neighborhoods and their personal preferences. In light of this, part of the association between parks and health outcomes may arise simply because physically active (and healthy) people choose to live in neighborhoods with more recreational amenities. This is important because policy interventions aimed at reducing obesity by increasing access to greenspace will not be effective if residential sorting drives most of the observed greenspace/health associations. <br /><br />
<br /><br />
We use restricted access data from the National Longitudinal Study of Adolescent to Adult Health (Add Health) to model the relationship between urban greenspace and health. The Add Health data set is uniquely equipped for this analysis because it merges comprehensive neighborhood characteristics with individual level data, including health outcomes. We use knowledge of residential sorting behavior to construct instruments for neighborhood amenity levels in order to address the endogeneity problem. Our findings show that time-variant unobserved variables bias downward the estimated effect of access to greenspace on health. This implies that simply adding fixed effects in a panel setting may not be sufficient for identification. Our study complements the current literature by yielding new evidence on how individual preferences for amenities depend on health status, and how much heterogeneous amenity values account for observed greenspace/health associations.

Averting Expenditures and Desirable Goods: Consumer Demand for Bottled Water in the Presence of Fracking

A. Justin Kirkpatrick
,
Duke University
T. Robert Fetter
,
Duke University

Abstract

Hydraulic fracturing (“fracking”) for shale gas and oil has brought a host of benefits<br />
including jobs, royalties, and tax revenues (Hausman and Kellogg 2015). At the same<br />
time, several studies suggest fracturing activity causes localized costs including<br />
decreased property values (Muehlenbachs et al. 2015a, Gopalakrishnan and Klaiber<br />
2014), rents (Muehlenbachs et al. 2015b), and increased purchases of bottled water<br />
(Wrenn et al. 2015). The latter paper suggests that higher expenditures on bottled<br />
water are suggestive of averting behavior, represent a lower bound estimate of<br />
compensating variation for a change in (perceived) water quality.<br />
<br />
We offer a new perspective on the welfare effect of nearby fracking activity. When<br />
consumers choose averting behaviors such as substituting bottled water for tap<br />
water, other characteristics of the good are incorporated into their willingness to<br />
pay – e.g., portability of bottles or better taste. If consumers gain positive utility<br />
from these characteristics, then expenditures on bottled water do not actually<br />
represent a lower bound on the compensating variation for a change in water<br />
quality.<br />
<br />
To address this issue, we develop a structural model of demand for bottled water<br />
and estimate it using supermarket scanner data covering markets coincident with<br />
fracking activity, both before and after the “shale gas boom.” Because the purchase<br />
of bottled water may not fully offset consumption of tap water, correlations between<br />
potential consumer choices and individual tastes for tap water are present. We<br />
address this issue in a horizontal discrete choice demand framework, drawing upon<br />
literature in empirical industrial organization (Nevo 2000, Hendel and Nevo 2006)<br />
and allowing for individual heterogeneity. We also develop a novel fine-grained<br />
measure of residential proximity to fracturing activity using detailed data on the<br />
spatial location of fracking sites and LiDAR satellite data to assess the visibility of<br />
fracking activity over both terrain contours and vegetative obstructions.
Discussant(s)
Alvin Murphy
,
Arizona State University
Daniel Phaneuf
,
University of Wisconsin-Madison
Lucija Muehlenbachs
,
University of Calgary
Doug Wrenn
,
Pennsylvania State University
JEL Classifications
  • Q5 - Environmental Economics