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ECON4410

Environmental and Resource Economics

Lab Assignment 2: NMV – HPM and DCE

This assignment is on hedonic price modelling and fishery’s economics. In your answer to each question, provide relevant reasoning (economic) for what you are doing and why you do so. The marks allocated to each question (and sub-questions) are given in parenthesis. Logical interpretation of answers carries higher proportion of marks. Also, note that when you use diagrams to show any results, always label the axes properly with relevant units.

Submission instructions: Please submit the assignment report before the due date through Turnitin in LMS using the submission link. While marking the assignment we would like to see what you have done in one word (or pdf) document, so copy the relevant columns from excel and paste them appropriately in the word file. You must use assignment cover sheet. Remember to sign the assignment cover sheet and also put your name and student ID in the document as well, not only in the cover sheet, unless you submit the cover sheet and the answer sheet as a single document. IF you use EXCEL to find solutions, submit the excel file as well using a separate link provided.

Hedonics question 1 (20%)

There has been a new park created in a suburb, and we need to know whether the money spent generated more benefits than it cost.

A study has been conducted using a hedonic price method which has identified how the price of houses in the area have been affected by the change.  The estimate is the change in house prices will not occur until year 10, when the park has become mature.

The key information is:

Timeline of costs:

Number of houses in area affected: 210

Median price of houses affected in area, before the intervention: $500,000

Estimated increase in price as a result of the intervention: 6%

Year in which the increase in price occurs: year 8.

Part a (7%)

In excel, conduct a cost benefit analysis of whether it was worth providing the park.  In undertaking the analysis report the benefit cost ratio at 3 different interest rates: 5%, 10% and 15%.

Part b (5%)

Estimate the breakeven increase in house price, at interest rates of 5%, 10% and 15%.

Part c (8%)

A subsequent hedonic price study has suggested that the estimate of the increase in house prices reported above is not completely accurate.  It suggests that in year 8, when the park is mature, the house prices will be 6% higher than before the park created, but also that there will be a 3% increase in house prices in years 5-7, once the construction has finished.  

Note that both of these changes in house prices are relative to the initial price: they are not cumulative.

Re-estimate the benefit cost ratio at the 3 interest rates used above.

Reporting

Write a simple report of what you have found in the word document, clearly setting out what you have done, and the answers to Parts a-c.  You should also submit an excel file that shows how you have structured the analysis to get these results.  The excel file should have separate sheets for Part a/b, and Part c.

Hedonics question 2 (30%)

A researcher has undertaken a hedonic price study on the effect of air quality and distance to the nearest local park.

There are two files that are relevant for this study:

econ4410hp_2023.csv, which contains the data, and econ4410lab2hp.R , which is the R script file that reproduces the 3 models we want to consider.

The only difference between the models is the functional form used.

What you need to do is: run the script file to produce the results from the three different models.

Generate the implicit prices for each of the variables in the model, for each of the three models, by adding appropriate commands to the R script file.

Write up your results in the word document, which should include:

A statement of the formulae that you used for the different functional forms that are appropriate to estimate the implicit price of the dependent variables, in each model.

Summarise the implicit prices in a table, so you can compare what the implications are of choosing different functional forms to model this relationship.

Variables in the data file:

p price of the house $’000

lp ln(p)

area area of block (m^2)

larea ln(area)

beds number of beds in house

baths number of bathrooms in house

carparks number of parking spaces for house

singles whether the house is single story: coded 0 for no, 1 for yes

distpark distance to nearest park, m

airq air quality index, from 0-10, with higher values being better quality

lairq ln(airq)

Write a brief summary of what you have found from this exercise, both in terms of the relationships between the variables and price, and the implications of using different functional forms.

Reporting

Write up your brief summary and table in the Word document.  Also cut and paste the R script file that you used to generate your results, and include that as an appendix in your word document. If this script is run it should replicate all of the results you report. Also, in appendix (not in your summary document) cut and paste the results from your estimation of the 3 models (mod1, mod2 mod3).

DCE Question 3 (50%)

You have completed a stated preference study to identify the values that people hold for increasing the area of public parks that are available to people in Perth.  You conducted a discrete choice experiment, with the following attributes:

Play: The area of recreational playing fields in the local area, ranging from 10 to 50 hectares

Green: The area of green open space in the local area, ranging from 5 to 70 hectares

Cost: The additional cost to respondents of changing the area of public parks ($)

You also measured some sociodemographic variables of the sample, including:

Inc: Their income level which ranged from $20k to $100k, mean =$50k.

Child: Whether they had children, 0=no, 1=yes.

In Table 1 below are the results from a simple conditional logit model.  All parameters estimated were significant.

Table 1  Parameter estimates from a conditional logit model.  All parameters are statistically significant

a) (10%)  

Provide a brief summary statement, explaining your interpretation of what these coefficients imply about peoples preferences.

b) (10%)

Provide a table showing the Willingness to Pay for an additional hectare of Playing fields (Play) and an additional hectare of green open space (Green).

You should report these values for someone who has children, and someone who does not, and for people at the lowest, highest, and average income levels, and provide a brief commentary on these values.

You decide to repeat your statistical analysis, but using a latent class analysis.  The preferred structure was 2 classes, and the estimates are reported in Table 2 below.

Table 2  Parameter estimates from a latent class model.  All parameters are statistically significant

c) (10%)  

Provide a brief summary statement, explaining your interpretation of what these coefficients imply about people’s preferences.

d) (10%)

Provide a table of the willingness to pay for an additional hectare of playing fields and green open space for the two classes, and the status quo effect.  What do you thing these values imply for the acceptability of providing an increase in public open space?

e) (10%)

Currently there is 20 hectares of playing fields, and 10 hectares of green open space in the region.  The local council think they could increase that to 25 hectares of playing fields and 17 hectares of green open space, but it would require an additional cost of $147 per year from people.  Do you think that the council will get support for this proposal?  Why?