A Hedonic Approach
New Horizons in Environmental Economics series
Chapter 4: Hedonic Measure as an Approximation of Benefit
4. Hedonic measure as an approximation of beneﬁt INTRODUCTION As we discussed in the last chapter, the overestimation theorem is strong, especially with relation to the equality conditions of Kanemoto’s theorem. This suggests a broader applicability of the hedonic measure based upon cross-sectional capitalization. But unfortunately, even in the Cobb–Douglas speciﬁcation, we cannot obtain clear results on the level of overestimation when we use the hedonic measure as an index of gross beneﬁts of the projects. More precisely it is not clear to what extent we can apply the hedonic measure as an approximation of the real gross beneﬁt when we evaluate the beneﬁts of large-scale projects in space and in a degree of improvement. We shall examine this question by adopting the following measure: B/(C ϩV ). (4.1) This ratio shows the approximation of the hedonic measure to estimate the exact gross beneﬁt. If it is close to unity then capitalization is mostly achieved. As far as the practical cost–beneﬁt analysis is concerned, a ratio of less than 1.2 or 1.3, though not unity, still makes sense, since beneﬁt ﬁgures estimated in conventional environmental studies sometimes diﬀer by more than two or three times. EXAMINATION OF OVERESTIMATION RATIO The existing literature shows that marginal improvements can be measured but fails to identify how large projects can be measured by these methods quantitatively. We introduced two criteria to measure 29 30 The economic valuation of the environment and public...
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