Sunday, May 8, 2011

Methods for Estimating Economic Damages from Environmental Contamination

Abstract: While significant attention has been given to the decrease in property values associated with environmental contamination (i.e., stigma effects), little attention has been given to the stigma impacts on the local community as a whole. In addition, most estimates of stigma damages have been performed within a community, using distance from contamination or comparing contamination and non contamination areas in the community. In this article we determine stigma damages by analyzing property values in comparable communities and develop the rationale for estimating the community impact associated with environmental contamination that extends beyond the impact on individual property owners. These impacts were estimated for the environmental contamination from zinc smelting in the municipality of Blackwell, Oklahoma. The impacts were measured in terms of lost ad valorem tax revenue using hedonic pricing and average treatment effects.
A three bedroom, two bathroom, 1,500 square foot, 20 year old house (with a total of nine rooms), with garage and central air, was estimated to have a price of $42,788 in Blackwell in 2009. The same house would have a price of $56,665 in Hugo and $91,102 in Pauls Valley.
average treatment effects were calculated to demonstrate causality. Average treatment effect is a methodology that compares outcomes between a control group and a treatment group. For this research, the treatment group consisted of properties located in Blackwell. Average treatment effects uses ordinary least squares to estimate coefficients on the difference in values between matched observations between the control and treatment groups; by differencing the observed values of matched observations, only those characteristics for which significant differences exist remain in the regression to explain the observed difference in prices. Theoretically, the only difference between the matched observations is the treatment, or in this case, the location of the property. The procedure matched property records from both groups using a propensity score, which is an index based upon property characteristics, and a kernel matching algorithm that matches each member of the treatment group to an average of control members in a corresponding block (or subset) of observations. This two-stage matching procedure minimizes the error that can be introduced into the analysis due to matching observations using multiple characteristics. Tests were used to ensure that the statistical properties of the matched treatment and control groups across subsets were similar prior to computing the average treatment effect. Due to the complexity involved in matching over 10,000 observations in the pooled dataset, this analysis was performed on each year of data in the sample....

The results of the average treatment effects provide strong evidence that, in all but one year, the difference in housing prices between Blackwell and the other communities was due to the property’s location. A property lost between 25% of its value (measured as price) in 2004 and 61% of its value in 2008 by being in Blackwell. Only in 2007 were prices in Blackwell statistically comparable to those in other communities.

The purpose of this paper, however, is not simply to estimate the property value loss due to the contamination in Blackwell, but to estimate the impact such value loss had on public services funded through ad valorem taxes. The hedonics model is used to estimate the lost value of existing residential real estate as a result of the stigma associated with the Zinc smelter contamination.
[With respect to] lost property tax associated with the reduced value of existing residential real estate as a result of the stigma damages, for past damages, the lost value of existing homes was estimated as the difference between the hedonic price prediction in Blackwell and the average across all other communities, using the features of an average home described above; this difference is $28,150. Future lost values were estimated as the difference between the predicted price in Blackwell and next lowest predicted price, which was in Hugo, or $14,517.

To estimate the lost value of homes not built a simple model of expected number of homes was used as;
Housing starts (%built 1980-2007) =f(popcity, popcounty) where;
popcity = the % change in the population of the 16 communities from 1980 – 2007
popcounty = the % change in the county population of the 16 communities, 1980 – 2007

This model predicted that housing starts should have increased by 13.3%, however actual starts were only 7.4%. The total housing units in Blackwell are estimated at 3,527 in 2009 and thus an estimated 209 houses were not built as a result of the stigma. The cost per square foot of building these houses was estimated as the current (2009) value of construction ($83 per square foot) deflated to each specific year.

For the years from 1980 to 2009, the actual values for millage rate and sales tax rate are known. For years beyond 2009, the discounted value of Stigma is measured using the 2009 value and a discount rate of four percent....

The total impact, past and future associated with the stigma attached to the environmental contamination from the zinc smelter is estimated at approximately $12.7 million. This represents the lost revenues to the city of Blackwell from the sales and property taxes that would have occurred in the absence of the environmental contamination. While these represent the direct impacts of the contamination on the city tax collections, additional damages may occur as a result of not spending this $12.7 million on city infrastructure and services. That is, because the city has not provided the additional services or facilities associated with the $12.7 million, the “livability” of the city is and will continue to be reduced.

by Dave Shideler 1 and Michael R. Dicks 2
1. Oklahoma State University
2. Oklahoma State University
Southern Agricultural Economics Association; 2011 Annual Meeting, February 5-8, 2011, Corpus Christi, Texas; 14 pages
Keywords: environmental damages, environmental contamination

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