Impact of air and water pollution on housing prices: A spatial hedonic analysis for the pulp and paper industry

This dissertation proposes an integrated spatial hedonic price model to analyze the impact of air and water pollution on housing prices. Effect of pollution is captured more efficiently in a spatial framework where relative locations of polluting source and agents affected by the pollution are important determinants of the process. The models constructed indicate the presence of significant spatial variability in pollution flow, justifying the inclusion of the spatial dimension in the hedonic framework. The spatial framework also helps to analyze both air and water pollution in the same model. The dynamics of the two are different making it difficult to capture the impact of both forms of pollution effectively in one model, which is overcome by constructing a spatial model.; The first part analyzes the capitalization process incorporating two types of spatial relationships in neighborhood effects—spatial dependence and spatial heterogeneity. Results indicate significant effects of air and water pollution on housing prices, with larger effects for air pollution. Downstream houses seem to be more affected by water pollution than houses that are upstream or away from the water. Some of these impacts appear to be larger for houses in better-quality neighborhoods indicating the presence of spatial heterogeneity.; The second part examines the changes in consumer's perception about pollution from 1980 to 1990. Also analyzed is the question of market segmentation, in terms of rural and urban areas to verify whether the capitalization process is different for different settings. Results indicate air pollution has a higher marginal impact in urban areas than rural areas for both 1980 and 1990. A 10 percent reduction in air pollution in 1990 increases average housing price in urban areas by 0.07 percent and by 0.03 percent in rural areas. For 1980, the corresponding increase for urban areas is 0.03 percent and no significant impact in rural areas. Downstream houses again show a consistently higher capitalization of water quality for both urban and rural areas with a more prominent spatial distinction for rural areas where a 10 percent reduction increases average housing price by 0.03 percent in 1990 and 0.01 percent in 1980.