The Economic Valuation of the Environment and Public Policy

The Economic Valuation of the Environment and Public Policy

A Hedonic Approach

New Horizons in Environmental Economics series

Noboru Hidano

The importance of the hedonic valuation approach in public policy evaluation and environmental value estimation is now widely accepted. This book is especially designed to illustrate the basic assumptions of the hedonic approach and highlight the strengths and weaknesses associated with it. Combining rigorous theoretical analysis, detailed empirical studies and an extensive history of hedonic valuation, the book is both a good introductory text to the field and a precise yet comprehensive aid for professionals and practitioners alike.

Chapter 3: Theory of Capitalization Hypothesis

Noboru Hidano

Subjects: environment, environmental sociology, politics and public policy, public policy


TWO TYPES OF CAPITALIZATION As we discussed in the previous chapter, the hedonic approach assumes that the consumer’s preferences of the attributes of a good are reflected in the price differences of goods. In other words, the value of attributes for the consumer is incorporated into the value of the price of a good. Then the value differences should result in the different prices of a good. This phenomenon is called capitalization. We can see many examples of capitalization in the market. In the stock market, the future profits of a company are capitalized into the stock price of the company. In a space market, such as a land or housing market, the future rent of a space is capitalized into the value of the space. In the labour market, the value of the skill of a worker should be capitalized into the wages of the worker. A cost should also be capitalized into the prices. For example, future property taxes should reduce the value of space (land, housing), that is, the tax is negatively capitalized into the value of space (land or housing). If the rate of the property tax is different from city to city, then the space (land or housing) price difference among these cities should reflect the rate difference (on capitalization, see Oates, 1969; Starrett, 1981, 1988; among others). From this discussion, we can understand that there are two types of capitalization. One is time-series capitalization such...

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