Towards the Measurement of Spatial Welfare

This paper develops a framework for assessing the welfare effects of the capitalisation of the value of environmental quality in the price for land, combining elements from environmental and spatial economics on the basis of equilibrium considerations for population games. Its main contribution to environmental economics consists of introducing a consistent concept for spatial welfare. Following the introduction of estimable locational sorting models in valuation methodology, the relationship between the theoretical underpinnings of the hedonic pricing model and the bid rent concept in urban economics is re-examined. This is done along the definition of a general equilibrium willingness to pay (GE-WTP) that is at the heart of most applications of locational sorting models in environmental economics. A GE-WTP should be able to value non-marginal changes in a spatially explicit distribution of local public goods. Commonly, such a GE-WTP is derived as a Hicksian WTP adjusted for endogenous land prices. This paper offers an alternative interpretation. For a GE-WTP, endogenous prices are typically enforced by a market clearing condition, often an exogenous supply. It is demonstrated how for a discrete choice formulation, a fixed supply per location results in a Nash equilibrium in bid rents. Furthermore, it is shown that this Nash equilibrium corresponds exactly to a spatial equilibrium in urban economics. In this stylised context a GE-WTP could be thought of as a measure for the dfference in social welfare between two spatial equilibria. As a money-metric measure, the GE-WTP could be translated to the difference in expenditures in which capitalisation is accounted for in quality-adjusted prices for land. These observations allow for a novel spatially explicit approach to the evaluation of land policy options, combining current cost-benefit practice with the optimisation of land use. Suggestions for operationalisation are put forward.