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Hedonic Pricing for a Cost Benefit Analysis of a Public Water Supply Scheme

Hedonic Pricing for a Cost Benefit Analysis of a Public Water Supply Scheme. Presentation by Amy Walker. Citation. Paper by T. Coelli, J. Lloyd-Smith, D. Morrison and J.Thomas Found the article through AgEcon Search. Primary Questions.

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Hedonic Pricing for a Cost Benefit Analysis of a Public Water Supply Scheme

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  1. Hedonic Pricing for a Cost Benefit Analysis of a Public Water Supply Scheme Presentation by Amy Walker

  2. Citation • Paper by T. Coelli, J. Lloyd-Smith, D. Morrison and J.Thomas • Found the article through AgEcon Search

  3. Primary Questions • Should the Comprehensive Water Supply Scheme of Southwestern Australia be expanded? • Are previous C-B analyses incorrect? • Agaton found benefits to equal only 25% of costs • Farmers dispute this for not valuing security and domestic convenience • However, farmers costs are less than project costs

  4. South Western Australia

  5. Methods • Ex ante cost benefit analysis • Latin for “from before” • Meaning before the event, based on proir assumptions; a forecast • Hedonic Pricing to value benefits • Log-log functional form

  6. Methods- Hedonic Pricing • “The implicit marginal price or hedonic price approach to the analysis of a market for a differentiated good explores the relationship that exists between the price of a good and the bundle of characteristics which the good possesses, to explain variations in the prices of the differentiated goods under consideration” (3).

  7. Methods- Hedonic Pricing • A method of estimating demand or value that decomposes the good into characteristics that can be valued. The value of the good is worth the value of all the characteristics. • Under perfect competition, with products which can accurately be valued by the sum of their parts, you can make a model which values any one of those parts. Using a partial derivative, you get a marginal value for one more unit of a particular characteristic. • In this case, the aim is to give Scheme connection a monetary value to compare to the costs.

  8. Methods- Hedonic Pricing • This method and equation was first used in 1974 by Rosen. • Pi = f(Zi) + ui • Pi = price of the i-th good • Zi = a vector of the characteristic of the good • ui = random disturbance term

  9. Dummy variables used for non- numeric data such as quality of pasture and whether or not the property was connected to the Scheme. After consideration of the Lakes District, saltiness was added as a dummy variable. Methods- Hedonic Pricing

  10. Methods- Hedonic Pricing • Variables split into three categories • Those influencing profitability -Rainfall, area, salt, pasture, fence, and water • Those influencing residential amenity -Home • Those influencing both production and consumption -Buildings, scheme, and distance

  11. Methods- Log-log functional form • “Economic theory rarely offers a strong direction as to the correct functional form to be used” (6).

  12. Methods- Log-log functional form “A large number of coefficients have T-Ratios of less than one.” Pasture 1&2, Fence 1&2, Water 2, Light and Medium soil were removed.

  13. Methods- Log-log functional form Final form and data

  14. Data Sources • Agaton (1981) to help frame the study • Valuer General’s Office of Western Australia • Data from 129 land sales, 62 of them on Scheme water • Sales between March 1987 and June 1989 • Stone (1989) • provided the present value of average capital cost of Scheme connection per farm.

  15. Results • Scheme water connection values varied between the northeast and the Lakes District • Coefficients were 0.0712 and 0.1847 respectively • This gives average per hectare prices of $18.44 and $77.39 • Reasons • Higher crop and flock densities in the Lakes District mean higher marginal benefit of a gallon of water. • Saltiness of Lakes District means dams, water tables and catchments are less viable. Scheme water is much more valuable.

  16. Results • Benefit Cost Ratios are the same or less than Agaton study. This is even a generous estimate because: • Farm prices reflect benefits both of Scheme connection AND value of piping from Scheme to elsewhere on the farm. • This estimate ignores the opportunity cost of taking water from dams on the west coast. • Does not account for maintenance costs of the Scheme.

  17. Results • Even though this study included the value farmers attribute to Scheme water in the marketplace through real estate, the benefit cost ratios are the same or smaller depending on location. • “Scheme expansion cannot be justified on economic grounds” (19).

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