Quality Adjustment for Spatially-Delineated Public Goods: Theory and Application to Cost-of-Living Indices in Los Angeles

Spencer Banzhaf

RFF Working Paper Series from Resources for the Future

Abstract: This paper illustrates how public goods may be incorporated into a cost-of-living index. When public goods are weak complements to a market good, quality-adjusted prices for the market good capture all the welfare information required. They are also consistent with a Laspeyres index that maintains the bound on a true cost-of-living index. The paper recovers this information from a discrete-choice model, using a simulation routine to solve for the appropriate price adjustments. These concepts are applied to the case of housing, education, crime, and air quality in Los Angeles for 1989 to 1994. Over a period of time when they are improving, incorporating pubic goods into the index lowers the estimated change in the cost of living by 0.5 to 2.6 percentage points. In other years, when public goods diverge, the estimated annual adjustment differs by model, with a range of -0.2 to +1.3 percentage points.

Keywords: air quality; discrete choice models; green accounting; nonmarket valuation; price inde (search for similar items in EconPapers)
JEL-codes: C51 D12 D60 E31 H40 R10 (search for similar items in EconPapers)
Date: 2002-03-01
New Economics Papers: this item is included in nep-dcm, nep-mac, nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Working Paper: Quality Adjustment for Spatially-Delineated Public Goods: Theory and Application to Cost-of-Living Indices in Los Angeles (2002)
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