Hedonic Price Analysis and Selectivity Bias: Water Salinity and Demand for Land

Abstract

Groundwater scarcity has an important qualitative dimension that further limits the supply of usable water. Groundwater quality may affect the productivity of land as an input in agricultural production. Where this is so, the structure of land rents and prices will reflect these environmentally determined productivity differentials. Hence, by using data on land rent or land value for different properties we can in principle identify the contribution which the attribute in question, fresh groundwater quality, makes to the value of uwillingness to pay for) the traded good, land. This identifies an implicit or shadow price for the attribute fresh groundwater quality, which in turn can be interpreted as an estimate of the in situ scarcity value of the marginal unit of the environmental resource. Methods commonly used to implement this approach include (i) the hedonic technique pioneered by Griliches (1971) and formalized by Rosen (1974); and (ii) the travel cost valuation methods first proposed by Hotelling (1931), and subsequently developed by Clawson (1959) and Clawson and Knetsch (1966). The relationship between land prices and surface and groundwater access (both in quantity and quality terms) has been studied in the hedonic framework by Miranowski and Hammes (1984), Gardner and Barrows (1985), Ervin and Mill (1985), King and Sinden (1988), Caswell and Zilberman (198b) and Torell et al. (1990). Travel cost techniques employed to measure the welfare effects to changes in water quality of recreational sites include Binkley (1978), Freeman (1979), Caulkins et al. (1986), Smith and Desvousges (1986) and Bockstael et al. (1987).

We thank the Government of Cyprus and the European Commission, DG XII, for financial support and the Cyprus Ministry of Agriculture, Natural Resources and the Environment, for helping in the collection of the data used in the empirical analysis. The chapter is based in part on work done by the first author for her Ph.D. thesis at the Faculty of Economics and Politics, University of Cambridge. The responsibility for the analysis and interpretation of the data is, of course, ours.