Hedonic Price Functions and Spatial Dependence: Implications for the Demand for Urban Air Quality

Abstract

In 1967, Ronald Ridker and John Henning conducted the first study that linked air pollution to property values. Using census level data, they found that, for St. Louis, air pollution had a negative and significant affect on median housing prices. Research since has verified, modified, and redefined the economic interpretation of this relationship. In summarizing twenty-five years of property value/air pollution literature, Smith and Huang (1993, 1995) reported that approximately 74 percent of the studies found at least one significant air pollution variable. Even allowing for a publication bias toward significant findings, there seems to be a preponderance of evidence that air pollution is negatively related to housing prices. This is important because it reveals information about the willingness to pay for air quality — a nonmarket commodity. Moreover, to the extent that policymakers use the results from air pollution/property value studies, the findings are socially relevant. The South Coast Air Quality Management District, for example, uses a property value based model in formulating their Air Quality Management Plans.