Introduction

There are a number of empirical studies, mainly in the developed country context, that use the hedonic property prices approach to estimate the value of environmental goods. The study reported in this chapter is the first of such studies in South Asia. Hedonic prices models (property prices or wages) can be used to estimate a variety of benefits from environmental improvements while other valuation methods like household health production function methods or travel cost methods are specially designed to estimate health benefits or recreational benefits. For example, a generalized hedonic price model analysing house prices, travel costs and wages in an urban area can be used to comprehensively measure the benefits from air pollution reduction.

Hedonic property price models consider the property price as an increasing function of environmental quality, given house characteristics. Similarly, the individual's marginal willingness-to-pay is a decreasing function of environmental quality – this is the inverse demand function for environmental quality. Obtaining estimates of these functions with these required properties depends upon – (a) good quality data and(b) estimation of appropriate functional forms. This chapter uses data collected through two carefully designed household surveys in Delhi and Kolkata, to show the importance of using appropriate functional forms in the estimation of hedonic property value models. It also provides estimates of consumer surplus benefits to households in both the cities from reducing air pollution to a safe level.

South Asia houses some of the urban conglomerations in the world that are worst affected by air pollution.