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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)

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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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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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Related research
Keywords: 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, and Regional Economics - - General Regional Economics - - - General

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References listed on IDEAS
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  1. Holger Sieg & V. Kerry Smith & Spencer Banzhaf & Randy Walsh, 2000. "Using Locational Equilibrium Models to Evaluate Housing Price Indexes," NBER Working Papers 7934, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Hausman, Jerry, 1999. "Cellular Telephone, New Products, and the CPI," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(2), pages 188-94, April.
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  4. Amil Petrin, 2001. "Quantifying the Benefits of New Products: The Case of the Minivan," NBER Working Papers 8227, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Nordhaus, William D, 1999. "Beyond the CPI: An Augmented Cost-of-Living Index," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(2), pages 182-87, April.
  6. Nechyba, Thomas J. & Strauss, Robert P., 1998. "Community choice and local public services: A discrete choice approach," Regional Science and Urban Economics, Elsevier, vol. 28(1), pages 51-73, January. [Downloadable!] (restricted)
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  7. David M. Cutler & Mark McClellan & Joseph P. Newhouse & Dahlia Remler, 1996. "Are Medical Prices Declining?," NBER Working Papers 5750, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Blomquist, Glenn C & Berger, Mark C & Hoehn, John P, 1988. "New Estimates of Quality of Life in Urban Areas," American Economic Review, American Economic Association, vol. 78(1), pages 89-107, March. [Downloadable!] (restricted)
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  11. Chattopadhyay, Sudip, 2000. "The effectiveness of McFaddens's nested logit model in valuing amenity improvement," Regional Science and Urban Economics, Elsevier, vol. 30(1), pages 23-43, January. [Downloadable!] (restricted)
  12. Banzhaf, H. Spencer, 2002. "Green Price Indices," Discussion Papers dp-02-09-, Resources For the Future. [Downloadable!]
    Other versions:
  13. David Revelt & Kenneth Train, 1998. "Mixed Logit With Repeated Choices: Households' Choices Of Appliance Efficiency Level," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 647-657, November. [Downloadable!] (restricted)
  14. Smith, V Kerry & Huang, Ju-Chin, 1995. "Can Markets Value Air Quality? A Meta-analysis of Hedonic Property Value Models," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 209-27, February. [Downloadable!] (restricted)
  15. Quigley, John M., 1985. "Consumer choice of dwelling, neighborhood and public services," Regional Science and Urban Economics, Elsevier, vol. 15(1), pages 41-63, February. [Downloadable!] (restricted)
  16. Aviv Nevo, 2001. "New Products, Quality Changes and Welfare Measures Computed From Estimated Demand Systems," NBER Working Papers 8425, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Robert W. Fogel, 1999. "Catching Up with the Economy," American Economic Review, American Economic Association, vol. 89(1), pages 1-21, March. [Downloadable!] (restricted)
  18. Gillingham, Robert, 1983. "Measuring the Cost of Shelter for Homeowners: Theoretical and Empirical Considerations," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 254-65, May. [Downloadable!] (restricted)
  19. Timothy F. Bresnahan & Robert J. Gordon, 1996. "The Economics of New Goods," NBER Books, National Bureau of Economic Research, Inc, number bres96-1.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. H. Spencer Banzhaf & V. Kerry Smith, 2007. "Meta-analysis in model implementation: choice sets and the valuation of air quality improvements," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(6), pages 1013-1031. [Downloadable!]
    Other versions:
  2. Banzhaf, H. Spencer, 2002. "Green Price Indices," Discussion Papers dp-02-09-, Resources For the Future. [Downloadable!]
    Other versions:
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