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

Primary Questions Should the Comprehensive Water Supply Scheme of Southwestern Australia be expanded? Should the Comprehensive Water Supply Scheme of Southwestern Australia be expanded? Are previous C-B analyses incorrect? 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

South Western Australia

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

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). “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).

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. 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. 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. In this case, the aim is to give Scheme connection a monetary value to compare to the costs.

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

Methods- Hedonic Pricing 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 Variables split into three categories Variables split into three categories 1.Those influencing profitability -Rainfall, area, salt, pasture, fence, and water -Rainfall, area, salt, pasture, fence, and water 2.Those influencing residential amenity -Home -Home 3.Those influencing both production and consumption -Buildings, scheme, and distance -Buildings, scheme, and distance

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

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.

Methods- Log-log functional form Final form and data

Data Sources Agaton (1981) to help frame the study Agaton (1981) to help frame the study Valuer General’s Office of Western Australia 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) Stone (1989) –provided the present value of average capital cost of Scheme connection per farm.

Results Scheme water connection values varied between the northeast and the Lakes District Scheme water connection values varied between the northeast and the Lakes District –Coefficients were and respectively –This gives average per hectare prices of $18.44 and $77.39 Reasons 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.

Results Benefit Cost Ratios are the same or less than Agaton study. This is even a generous estimate because: 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.

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. 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). “Scheme expansion cannot be justified on economic grounds” (19).