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Article history:
Despite numerous hedonic studies on the value of clean air in developed countries, the lack
of similar studies in less developed countries has raised the question as to whether clean air
also matters in developing countries' megacities. As an attempt to fill this gap, we apply a
22 September 2008
hedonic property value analysis, the method commonly used to infer the value of clean air
in developed countries, using the combination of data on housing rental prices and their
characteristics from the Indonesian Family Life Survey, and data of the ambient level of six
different pollutants in Jakarta, Indonesia. The result indicates that, in the cases of lead, total
Keywords:
hydro carbon (THC), and SO2, air pollutants have a negative association with property value;
Hedonic prices
i.e., housing rental price. The relationship is at 5% level of significance for lead and 10% level
Air pollution
for THC and SO2. This paper estimates that per family value of clean air in Jakarta ranges
Environmental economics
Indonesia
JEL classification:
R22; H40; Q21; C14
1.
Introduction
Corresponding author.
E-mail address: budy.resosudarmo@anu.edu.au (B.P. Resosudarmo).
0921-8009/$ see front matter 2008 Elsevier B.V. All rights reserved.
doi:10.1016/j.ecolecon.2008.09.011
E CO L O G I CA L EC O NO M IC S 6 8 (2 0 0 9) 1 39 8 1 40 7
1399
2.
Hedonic property value studies and
air quality
In this paper, we use hedonic price analysis to investigate
whether or not air pollution affects property value represented by housing rental price and try to infer how much
people are willing to pay for an improvement in air quality.
Variability of air quality is an attribute of a house that may
affect the willingness to pay (WTP) for the house as a whole.
Hence, the structure of housing rents and prices will reflect
these differentials. By using data on rent/prices of different
properties we can in principle identify the contribution air
quality makes to the value of the traded good, the house. This
identifies an implicit or shadow price of these attributes,
which in turn can be used to calculate willingness to pay for
the non-marketed goods, namely air quality. The method
commonly used to implement this approach is the hedonic
technique pioneered by Griliches (1971) and formalised by
Rosen (1974).
However, hedonic property value analysis suffers from
theoretical and empirical problems. From the theoretical point
of view, some strong assumptions, which are the foundations
of this theory, are considered unrealistic by certain critics. The
market clearing condition, for example, requires that the
housing market is in equilibrium. It also requires a sufficiently
wide variety of housing models to be available, such that every
household is in equilibrium. Many consider this strong
assumption to be the reason why applying this framework to
the under-developed housing market in developing countries
is hardly feasible. However, the Jakarta metropolitan area,
being the Indonesian capital, has a relatively developed
housing and property market, especially compared to rural
areas of Indonesia. The housing market in Jakarta probably
almost meets a market clearing condition. For example, a
study by Struyk et al. (1990) on the Indonesian housing market
mentions that the urban housing market in Indonesia is
responsive to demand and flexible enough to changing
conditions (p. 112) and the rate of return on homeownership
appears to be competitive with other alternatives (p. 82).
These could be indications, though not necessarily, of a
market clearing condition.
It is also important to note Freeman's argument (1993,
p. 382383): this idealized model is clearly not an accurate
representation of real-world housing markets [nevertheless]
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3.
3.1.
Estimation methodology
Pollutant(s)
8.
9.
10.
11.
12.
4 US cities
13.
Seoul, Korea
14.
15.
Yang (1996)
Kwak et al. (1996)
Taipei
Seoul, Korea
SO2
Nox
TSP
TSP
3.
4.
5.
6.
7.
Study location
St. Louis, USA
St. Louis, USA
E CO L O G I CA L EC O NO M IC S 6 8 (2 0 0 9) 1 39 8 1 40 7
X
i
bi x1i
X
j
gj x2j e
where
yk
yk 1 k xk1i 1
; x1i
k
k
3.2.
Data
1401
1402
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Std.
deviation
Dependent variable
Monthly rent (rupiahs)
838,735
9,509,536
Structural characteristics
House size (m2)
Number of room
Wall material is cement/brick (1,0)
Roof material is concrete (1,0)
Floor material is ceramic/stone (1,0)
Water source inside (1,0)
74.821
5.306
0.783
0.004
0.294
0.662
79.179
2.793
0.413
0.065
0.456
0.474
Neighbourhood characteristics
Unemployment rate at the neighb. (pct)
People w. univ. educ. the neigh. (pct)
Accessible by public transport (1,0)
Distance to district centre (km)
Traffic (yearly number of vehicle passing)
1.465
6.872
0.960
6.561
234,265
2.492
7.773
0.197
4.485
81,546
Air pollution
Ambient level
Ambient level
Ambient level
Ambient level
Ambient level
Ambient level
92.439
22.879
2,696.106
139.011
319.844
0.367
23.361
8.627
386.040
46.421
84.916
0.085
of
of
of
of
of
of
PM10 (mg/m3)
SO2 (mg/m3)
CO (mg/m3)
NOx (mg/m3)
THC (mg/m3)
lead (mg/m3)
4.
House structural characteristics and neighbourhood qualities are strongly associated with house rent. This result is
relatively consistent with the results of Yusuf and Koundouri's
studies (2004 and 2005). Yusuf and Koundouri also implemented
a hedonic model to the IFLS data, but covered the whole of
Indonesia and focused on clean water provision. In all specifications, house structural characteristics; i.e. house size,
number of rooms, wall and floor materials, are all positively
associated (as expected) with house value and are significant at
the 5% level. Only roof material is significant at the 10% level.
Three out of four neighbourhood characteristics conform
to expectation, and are significant at the 5% level. The
unemployment rate within the neighbourhood is negative
and is significantly associated with house rent, whereas the
percentage of people with a university education, and accessibility of public transport are positively associated with house
values. Both are significant at the 5% level.
Distance to the centre of Jakarta, however, is not significant at
a conventional level, and two reasons may account for this. First,
it may not be a good measure of accessibility to employment.
The better measure may be the distance to the centre of a district
(or kotamadya in the case of Jakarta) where important business
centres are located. The second reason is that the accessibility
of employment might have already been captured by accessibility of public transport (which is positively significant).
The coefficient on traffic is significant at the 5% level. The
positive sign of this coefficient, however, needs to be carefully
interpreted. It may be argued that traffic not only represents the
congestion level but also proximity to other city attractions. So
these effects may oppose each other, and the latter seems to be
stronger.
All of the coefficients of pollution variables, except PM10,
are negative, suggesting better air quality is associated with
higher property value, and 3 out of 6 are statistically significant (10% for SO2 and THC, and 5% for Lead). This result has
a straightforward implication; i.e. it indicates that people in
Jakarta are concerned with air quality. By calculating the
marginal effect of a change in 1 unit of SO2, for example, it can
be interpreted that the capitalised marginal willingness to pay
(MWTP) for a permanent reduction of SO2 concentration is
around Rp. 275 thousand (Table 3). The formula to calculate
the capitalised MWTP is as follows:
W
25
X
1 rt 12 w
t0
where
W
w
r
t
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Neighbourhood characteristics
Public transport access (1,0)
People w. univ. education (%)
Unemployment rate (%)
Distance to district center (km)
0.0625
(10.89)
0.0810
(22.31)
0.1640
(3.62)
0.0672
(24.99)
0.0302
(4.44)
0.0629
(11.93)
0.0813
(23.68)
0.1548
(3.42)
0.0629
(23.04)
0.0339
(5.72)
0.0614
(11.00)
0.0791
(21.55)
0.1583
(3.42)
0.0671
(25.35)
0.0323
(5.02)
0.0621
(10.84)
0.0810
(22.10)
0.1640
(3.60)
0.0673
(25.01)
0.0303
(4.44)
0.0613
(11.17)
0.0816
(23.42)
0.1525
(3.24)
0.0640
(23.49)
0.0351
(5.95)
0.0610
(10.84)
0.0845
(24.39)
0.1541
(3.24)
0.0630
(22.03)
0.0357
(6.09)
0.0981
(8.85)
0.0052
(39.10)
0.0067
(7.34)
0.0072
(0.52)
0.1101
(11.00)
0.0051
(40.07)
0.0064
(7.97)
0.0070
(0.53)
0.1033
(9.66)
0.0050
(35.90)
0.0061
(6.72)
0.0049
(0.24)
0.0983
(8.85)
0.0053
(39.99)
0.0066
(6.95)
0.0069
(0.46)
0.1191
(11.71)
0.0052
(40.88)
0.0056
(5.62)
0.0036
(0.13)
0.1236
(12.47)
0.0055
(43.75)
0.0053
(4.85)
0.0037
(0.14)
0.0060
(0.01)
0.0650
(2.80)
SO2
0.2498
(0.98)
CO
0.0049
(0.01)
NOx
0.1968
(3.15)
THC
Lead
Constant
Lambda
s.e.
Log likelihood
LR chi-squared (11)
Capitalised marginal willingness to pay
Rupiah
US dollar
4.9275
0.1572
(0.02)
6,159
331.45
5.0527
0.1595
(0.02)
6,157
334.24
SO2
274,939
28.34
6.0606
0.1578
(0.02)
6,158
332.42
4.9662
0.1570
(0.02)
6,159
331.45
5.6452
0.1585
(0.02)
6,157
334.60
THC
828,308
85.39
0.0898
(4.41)
4.8122
0.1575
(0.02)
6,156
335.85
Lead
375,604
38.72
Note: Significant at 5% level. Significant at 10% level. Variable in italics are not transformed.
Number in parentheses (except for lambda) is LR chi-squared statistics. Number of observation is 470.
Calculated only for significant coefficients. See Eq. (2) for the formula used to calculate these numbers.
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Table 4 Result of BoxCox hedonic estimation (with traffic, dependent variable: monthly rent)
Structural characteristics
House size (m2)
Number of rooms
Wall is cement/brick (1,0)
Roof is concrete (1,0)
Floor is ceramics/stone (1,0)
Water source inside (1,0)
Neighbourhood characteristics
Public transport access (1,0)
People w. univ. education (%)
Unemployment rate (%)
Distance to district center (km)
Traffic
0.0362
(4.41)
0.0648
(11.40)
0.0860
(24.17)
0.1565
(3.18)
0.0662
(23.44)
0.0292
(4.02)
0.0361
(4.81)
0.0640
(11.81)
0.0873
(25.68)
0.1479
(2.96)
0.0617
(20.96)
0.0339
(5.42)
0.1087
(10.38)
0.0058
(43.79)
0.0052
(4.01)
0.0022
(0.05)
0.0889
(5.33)
0.1231
(12.87)
0.0058
(45.45)
0.0045
(3.23)
0.0009
(0.01)
0.0883
(5.79)
0.0611
(0.53)
SO2
0.0415
(6.23)
0.0613
(10.54)
0.0837
(23.02)
0.1438
(2.68)
0.0662
(23.53)
0.0336
(5.20)
0.0408
(5.57)
0.0624
(10.44)
0.0861
(23.55)
0.1581
(3.16)
0.0669
(23.31)
0.0297
(4.02)
0.0397
(5.77)
0.0620
(10.93)
0.0870
(25.09)
0.1465
(2.83)
0.0634
(21.75)
0.0347
(5.49)
0.0405
(5.93)
0.0618
(10.70)
0.0882
(25.30)
0.1515
(2.99)
0.0633
(21.22)
0.0341
(5.26)
0.1223
(12.56)
0.0056
(41.27)
0.0031
(1.34)
0.0053
(0.23)
0.1102
(7.69)
0.1083
(10.10)
0.0059
(44.63)
0.0046
(2.84)
0.0008
(0.01)
0.0822
(4.86)
0.1302
(13.17)
0.0059
(45.72)
0.0037
(2.08)
0.0023
(0.05)
0.0826
(5.07)
0.1271
(12.60)
0.0060
(46.86)
0.0040
(2.47)
0.0003
(0.00)
0.0671
(3.16)
(0.00)
0.0774
(3.78)
0.5376
(3.86)
CO
0.0172
(0.06)
NOx
0.2071
(3.41)
THC
Lead
Constant
Lambda
s.e.
Log likelihood
LR chi-squared
Marginal willingness to pay
Rupiah
US dollar
4.4495
0.1554
(0.02)
6,156
336.78
4.7973
0.1568
(0.02)
6,154
340.03
SO2
326,229
33.63
7.0062
0.1552
(0.02)
6,154
340.11
CO
2,264,205
233.42
4.7451
0.1544
(0.02)
6,156
336.31
Note: Significant at 5% level. Significant at 10% level. Variable in italics are not transformed.
Number in parentheses (except for lambda) is LR chi-squared statistics. Number of observation is 470.
Calculated only for significant coefficients. See Eq. (2) for the formula used to calculate these numbers.
5.4233
0.1559
(0.02)
6,155
339.66
THC
869,293
89.62
0.0747
(2.76)
4.6210
0.1553
(0.02)
6,155
339.01
Lead
312,324
32.20
E CO L O G I CA L EC O NO M IC S 6 8 (2 0 0 9) 1 39 8 1 40 7
5.
Conclusion
1405
A1
1406
E C O L O G IC A L E C O N O M IC S 6 8 ( 2 0 09 ) 13 9 8 1 40 7
A2
where u now is the i.i.d error term, and is the spatial error
parameter. The OLS estimation of the spatial error model will
be inefficient (Anselin, 1988) because it violates the assumption of the independence among disturbance terms.
In implementing the spatial analysis, we use both contiguity and distance to define the W matrix. To test the
existence of spatial dependence, we conducted a statistical
test to see whether in Eq. (A1) (the spatial dependence
model) is equal to zero. With H0: r = 0, and Ha: 0, the
statistics follow 2 distribution with 1 degree of freedom; we
fail to reject the null and conclude that no spatial dependence
is present in the model. A similar test is used for the presence
of spatial autocorrelation, or testing whether in Eq. (A2) is
equal to zero. Again, the presence of spatial autocorrelation is
rejected. In short, our exercises do not provide evidence of
spatial effect; i.e. the value of a property in one location is not
affected by the property value in other locations. Results of our
spatial analysis are available upon request.
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