A Hedonic Approach
New Horizons in Environmental Economics series
Chapter 7: Estimation of Hedonic Price Function
INTRODUCTION We have discussed the importance of hedonic price functions in the previous chapters since we need an accurate hedonic price function in order to determine sound environmental and public project beneﬁts based upon the limited nature of the discrepancy of the hedonic measures from the true values. The next stage is to concentrate on ﬁnding a method of estimating good hedonic price functions. But as we discussed in Chapter 2, the estimation of the functions is heavily dependent on the data. Thus the problem of the estimation can be reduced to the problem of sound data availability. In this chapter we shall take the property market as an example, although the discussions are applicable to other commodities as well. MARKET SEGMENTATION AND SAMPLE SIZE FOR HEDONIC ANALYSIS The ﬁrst question to ask in a practical hedonic analysis is ‘what market segment should we analyse?’ Clearly it depends on what we want to gain from the analysis. As far as the theory is concerned, the capitalization theorem in the previous chapters suggests that we should obtain the data from a market in which samples can be chosen from an area at the level of an amenity (or the level of public services), without a project (or a policy), and from an area at the level which would be achieved with the project that we have to evaluate. We must take into account the diﬀerent types of groups of consumers of an amenity, that is, those with di...
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