Quality Adjustment for Spatially-Delineated Public Goods: Theory and Application to Cost-of-Living Indices in Los Angeles
AbstractThis 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 InfoPaper provided by Resources For the Future in its series Discussion Papers with number dp-02-10-.
Date of creation: 01 Mar 2002
Date of revision:
air quality; discrete choice models; green accounting; nonmarket valuation; price inde;
Find related papers by JEL classification:
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- D60 - Microeconomics - - Welfare Economics - - - General
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- H40 - Public Economics - - Publicly Provided Goods - - - General
- R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-01-24 (All new papers)
- NEP-DCM-2006-01-24 (Discrete Choice Models)
- NEP-MAC-2006-01-24 (Macroeconomics)
- NEP-PBE-2006-01-24 (Public Economics)
- NEP-URE-2006-01-24 (Urban & Real Estate Economics)
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