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Quality Adjustment for Spatially-Delineated Public Goods: Theory and Application to Cost-of-Living Indices in Los Angeles

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  • Banzhaf, H. Spencer

    ()
    (Resources for the Future)

Abstract

This paper illustrates how public goods may be incorporated into a cost-of-living index. When public goods are weak complements to a market good, quality-adjusted prices for the market good capture all the welfare information required. They are also consistent with a Laspeyres index that maintains the bound on a true cost-of-living index. The paper recovers this information from a discrete-choice model, using a simulation routine to solve for the appropriate price adjustments. These concepts are applied to the case of housing, education, crime, and air quality in Los Angeles for 1989 to 1994. Over a period of time when they are improving, incorporating pubic goods into the index lowers the estimated change in the cost of living by 0.5 to 2.6 percentage points. In other years, when public goods diverge, the estimated annual adjustment differs by model, with a range of -0.2 to +1.3 percentage points.

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Bibliographic Info

Paper provided by Resources For the Future in its series Discussion Papers with number dp-02-10-.

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Date of creation: 01 Mar 2002
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Handle: RePEc:rff:dpaper:dp-02-10-

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Keywords: air quality; discrete choice models; green accounting; nonmarket valuation; price inde;

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Cited by:
  1. Banzhaf, H. Spencer, 2002. "Green Price Indices," Discussion Papers dp-02-09-, Resources For the Future.
  2. Smith, V. Kerry & Banzhaf, H. Spencer, 2007. "Quality adjusted price indexes and the Willig condition," Economics Letters, Elsevier, vol. 94(1), pages 43-48, January.
  3. Smith, V. Kerry & Banzhaf, H. Spencer, 2003. "Meta Analysis in Model Implementation: Choice Sets and the Valuation of Air Quality Improvements," Discussion Papers dp-03-61, Resources For the Future.

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