HEDONIC PRICE MODELS

Another possibility is that z is a desirable characteristic of certain residential property (e.g., “good” neighborhood, beautiful scenery or views, beachfront), which is in turn influenced by the services of an aquatic ecosystem (e.g., pristine environment, unpolluted water, good beaches, protected coastline). As a consequence, the market equilibrium for this residential property, and in turn its price P, will be affected by the desirable characteristic and, thus, the ecological services and environmental quality q that influences this characteristic

(7)

For a household purchasing this property, the budget constraint is likely to be

(8)

where M is again total household income and P is the property purchase. Substituting Equation (8) and z(q) into the utility function of Equation (1) for x and z, respectively; totally differentiating with respect to P and q; and rearranging yield the following condition for optimal choice of any ecological service q that affects the value of the residential property:

(9)

That is, the marginal willingness to pay for an improvement in environmental quality q must equal its marginal implicit price in terms of the impact of q on property values. Estimation of the hedonic price function in Equation (7) will allow this implicit price to be calculated.



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