Valuing amenities

By Eric Crampton 11/03/2013 4


A few things I tell my Economics & Current Policy Issues Class:

  • It’s double-counting to weigh the direct costs of some disamenity as well as the disamenity’s effects on land values because the latter incorporates the former (and the same for positive amenity affects);
  • We can weigh the value of hard to value things like mortality risk by looking for effects on priced markets. Differential on-the-job accident risk can give us measures of the value of a statistical life. The value of a neighbourhood park can be approximated by housing price effects, and the same for the value of neighbourhood disamenities.
And so I’ll have to remember this rather nice NBER working paper by Currie, Davis, Greenstone, and Walker. They pick a relatively hard case: plants that emit toxic chemicals that are sometimes hard to smell or see. They find emissions decline exponentially with distance from the plant, reaching baseline levels a mile from the plant. When a plant opens, housing prices in a half mile radius drop by 1-2%; when it closes, they go up by 2-3%. Within a mile, the price drop is 1.5%. A plant within a mile also increases the likelihood of having a low birthweight child by two percent (that percent, not percentage points, and the base rate incidence is low). 
When they add everything up, they find that a plant’s opening reduces average housing market capitalisation in the surrounding mile by $1.5 million on average,* and that the costs of low-birthweight births in the surrounding mile are about $700k. So the disamenity cost, as measured by housing prices, is about twice the biggest likely measurable health effect. And that’s entirely consistent with housing markets capitalising the real imposed disamenities. The biggest price effects are closest to the plant, where health disamenities combine with the noise and sight of the plant, then decline towards the one mile mark, where there are still real health effects but the other disamenities are negligible relative to those in the reference category of homes 1-2 miles away. 
They also find that neighbourhoods around plants pick up in demographic characteristics after a plant’s opening: people move there for jobs. They wonder whether this is consistent with fully informed decision-making, but it’s rather plausible that, given the low absolute risk imposed, households simply value being within walking distance of work more than they dislike the disamenties. 
On the whole I take this as pretty supportive of our base-line theory on this stuff and reasonable evidence against the “Oh, but people are stupid and irrational and they would never live there if they only knew and we have to ban a pile of stuff” alternative hypothesis.
* By way of comparison, they note that a typical plant – a small coal-power plant – costs $280m to build. The disamenity effect, though real, isn’t some big huge cost that would tip the balance against approving the plant were it incorporated. Note further that if you wanted to make a case for that the plant compensate surrounding neighbours as part of the approval process, I wouldn’t raise much argument against it: the plant’s opening does impose a technological externality that gets capitalised as a pecuniary effect.


4 Responses to “Valuing amenities”

  • > if you wanted to make a case for that the plant compensate surrounding neighbours as part of the approval process, I wouldn’t raise much argument against it: the plant’s opening does impose a technological externality that gets capitalised as a pecuniary effect.

    There is also an externality that gets capitalized from its closing, as you noted. Shouldn’t the neighbours pay something to the firm for closing down?

  • No reason they couldn’t band together to pay the plant to close, though I expect that the set of people who are there after the plant was in place would prefer that the plant stay there as many would there be employed.

  • On the face of it, this attempt to monetise loss of amenity lacks some pretty basic preconditions. For instance, what level of information was available to allow those living near (or considering living near) the facility to “price in” the dis-amenity?

  • Ashton, that’s the point here. Despite very plausible lack of information on the part of buyers, market prices of houses in the area moved as though information were good. Price movements were consistent with a full information story, even though it would have been unlikely that any buyer would have had full information. They got things pretty close to right.