ANALYSISLocal environmental quality and life-satisfaction in Germany
Introduction
In most developed countries standards for air pollution and noise exposure are an important part of environmental policy to improve local environmental quality. Often these standards are based on expert judgements and do not take into account peoples preferences. Although improvements in air quality or reductions in transportation noise are beneficial, they are nevertheless costly. As this money could be spent elsewhere in an economy, information on the social benefits is needed prior to implementing such standards.
Two valuation techniques have typically been used to derive the welfare benefits from reduced air pollution or noise nuisance. The hedonic price approach relies on data from the housing market whilst the contingent valuation method derives values by asking people directly about their willingness to pay.
The contingent valuation method is often criticized because of the difficulties related to the construction of a market and its numerous potential biases (see Mitchell and Carson, 1989 or Bateman et al., 2002, for a more recent overview of the method). The majority of studies apply the hedonic price approach to measure the benefits of air quality improvements or to value noise (see Freeman, 2003, for an overview of the method).
All hedonic studies assume that the ability of households to relocate eliminates the net benefits of different locations whilst simultaneously giving rise to compensating house price and in some cases, wage rate differentials.1 This requires the existence of perfect information, zero moving and transaction costs, as well as perfectly flexible prices. That these assumptions are more realistic for some countries than others is obvious. Perhaps it is not therefore very surprising that most of what is known about societal willingness to pay for improvements in air quality or reductions in noise nuisance comes from hedonic studies carried out in the United States or the United Kingdom. For Germany only one early hedonic study exists.2 Holm-Müller et al. (1991) analyse data on (self-reported levels of) noise exposure for three cities in Germany (Bielefeld, Bremen and Wuppertal) and find no significant effect of road traffic noise on property prices. For overviews of the empirical literature see Smith and Huang (1995) for air pollution studies and Nelson (2004) for noise pollution studies linked to airports.
This paper proposes a different approach to valuing air and noise pollution using data on subjective well-being (SWB). More specifically, the paper considers the link between perceived levels of noise and air pollution and self-reported happiness using individual-level data. We further test the stability of these regressions over both time and space and in addition test the extent to which any welfare impacts caused by noise nuisance and air pollution are also capitalised into hedonic house price regressions.
The remainder of the paper is structured as follows. Section 2 presents an overview of the economic research into the determinants of happiness focussing in particular on those few studies that have attempted to link happiness with environmental quality. Section 3 presents the analytical framework underlying the alternative approaches. Section 4 describes data sources and Section 5 the empirical implementation. Section 6 discusses the results and the final section concludes.
Section snippets
Literature review
One strand of economics is based on analysing people's decisions revealed through their market behaviour. Investigating, e.g., people's choices on the property market, should reveal their preferences for locations including environmental amenities as well as property characteristics. The hedonic price method takes advantage of this kind of information. However, an alternative is to focus on “experienced” utility, stressing the pleasure of consumption, as provided by survey measures of happiness
Analytical framework
In the hedonic framework house prices and the levels of environmental attributes are endogenous to the household in the sense that the household chooses where to locate. The household maximises utility, which is a function of the quantity of some composite good and the level of the environmental attribute. This maximisation process is subject to a budget constraint linking household income to expenditure on the composite commodity.
For an individual who occupies the house j the utility is given
Empirical analysis
Most of the data used in this study is taken from the German socio-economic panel (SOEP) survey. The SOEP is based on a set of pre-tested questionnaires for both households and individuals. Since 1984 the survey has provided annual information on housing, as well as on the occupation, employment history and earnings of individuals. It was extended to include former East Germany in 1990.
In addition to a stable set of core questions, each year the survey focuses on a special topic. In 1994, 1999,
The SWB model
The SWB data are analysed using an ordered probit model and the results of different model specifications presented in Table 2. These indicate that when all the data is pooled together there is a clearly discernible effect of both perceived noise and air quality on SWB. Note that the inclusion of air and noise quality as categorical rather than continuous variables does not result in a statistically significant increase in fit.4
Discussion
The current results require us to explain why perceived air quality and noise levels contribute to SWB but are statistically insignificant determinants of house prices, particularly when many other hedonic house price studies have uncovered significant parameter values.
One possibility is that hedonic studies have generally considered much smaller geographical areas, typically cities rather than an entire country. It may be that housing markets in Germany are geographically segmented and that
Conclusion
This paper compares the extent to which perceived measures or air quality and noise nuisance are reflected in measures of SWB and property prices. At least in the context of Germany it appears that perceived levels of air pollution and noise nuisance are not capitalised into property prices. This is most likely due to the fact that the housing market is highly regulated by the state. By contrast high noise levels and poor air quality markedly diminish SWB. Future analyses might attempt to apply
Acknowledgements
This paper benefits greatly from comments by Richard S.J. Tol and two anonymous referees. The Michael Otto Foundation for Environmental Protection provided welcome financial support. A version of the paper was presented at the 7th Conference of the International Society for Quality-of-Life Studies. All errors and opinions are ours.
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