Welfare measurement for environmental improvements using the hedonic model: The case of nonparametric marginal prices

Abstract

Research in environmental and natural resource economics frequently requires the use of hedonic models because of the differentiated products involved. This is true for studies of the relationship between environmental quality and property values or wages, or between the characteristics of a recreation site and the demand for its services. An obvious use of such studies is in estimating willingness to pay for improvements. With differentiated products there are usually nonlinear hedonic price schedules and thus nonlinear budget constraints. This makes welfare analysis difficult because standard duality results no longer hold. This paper develops a technique for estimating a psuedo demand system that can be used to derive exact measures of consumer welfare change. Similar techniques are developed for producers with a psuedo profit function that can be converted to an exact measure of the change in quasi-rents or rents. The paper also shows that the distance function can be used to develop an ex ante measure of welfare change.