Applying the Hedonic Pricing Method and Cost Benefit Analysis to Sand- Feeding Projects - an Empirical Pilot Survey in Gribskov Municipality (30ECTS)
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University of Copenhagen MSc in Environmental and Natural Resource Economics Master Thesis Applying the Hedonic Pricing Method and Cost Benefit Analysis to sand- feeding projects - An empirical pilot survey in Gribskov Municipality (30ECTS) Main Supervisor Søren Bøye Olsen (50%) Co-Supervisor Toke Emil Panduro (50%) Student Name Konstantinos Douvis Student number wgk869 Submission Date 15th December 2014 Applying the Hedonic Pricing Method and Cost Benefit Analysis to sand- feeding projects - An empirical pilot survey in Gribskov Municipality 2 Applying the Hedonic Pricing Method and Cost Benefit Analysis to sand- feeding projects - An empirical pilot survey in Gribskov Municipality Picture Cover.1 - Taken by the author on June 2013 presenting the coast-protection installations in Gribskov Municipality Copies printed: 4 3 Applying the Hedonic Pricing Method and Cost Benefit Analysis to sand- feeding projects - An empirical pilot survey in Gribskov Municipality Table of Contents Abstract…………………………………………………..5 Preface…………………………………………………....6 List of tables……………………………………………..7 List of figures…………………………………………….8 Chapter 1 -Introduction…………………………………9 Chapter 2- The theory o 2.1 Cost-Benefit Analysis………………..............14 o 2.2 Hedonic Price Method……………….............19 o 2.3 Previous examples of C.B.A…………………23 o 2.4 Previous literature of H.P.M…………………25 Chapter 3 - The data o 3.1 Data for the project…………………………..29 Chapter 4 – Analysis and results o 4.1 Estimating the Costs………………………....33 o 4.2 Estimating the Benefits using the HPM……..35 o 4.3 The Cost-Benefit Analysis…………………...38 o 4.4 Sensitivity Analysis 4.4.1 Discount rate (r)……………………………41 4.4.2 Time horizon……………………………….44 4.4.3 Dead-weight loss…………………………...46 Chapter 5 - Policy proposal o 5.1 Presenting the results………………………...49 o 5.2 Policy proposal……………………………....51 Chapter 6 - Conclusion…………………………………53 Bibliography …………………………………..………..57 Appendix Ι …………………………………….……...61 Appendix II ……………………………………………65 4 Applying the Hedonic Pricing Method and Cost Benefit Analysis to sand- feeding projects - An empirical pilot survey in Gribskov Municipality Abstract This report investigates the impacts of a sand-replanting project which occurred in Gribskov Commune in the city of Copenhagen, Denmark. Due to erosion from sea tides and winds most of the sand has been removed from the beaches of Gribskov and it is stuck in the area of the new harbor. The Municipality thought of a project in order to restore the beaches to their previous situation. They are going to do sand-feeding to the beaches with a ship and that will eventually add value to the prices of the houses in the area and attract more tourists. In order to give a monetary value to these improvements a Hedonic Pricing Method has been applied to this study. By using data from houses in the area and numerous other property-related characteristics, it has been found that the sand-replanting project has a positive impact on property values and therefore the project should be implemented. However, when we take into consideration the dead-weight loss we conclude that the project should not be financed with indirect taxes. 5 Applying the Hedonic Pricing Method and Cost Benefit Analysis to sand- feeding projects - An empirical pilot survey in Gribskov Municipality Preface This report is a 30 E.C.T.S. Master Thesis in Environmental and Natural Resource Economics. It is written for the Faculty of Science, University of Copenhagen. I would like to express my special thanks to my supervisors, Søren Bøye Olsen and Toke Emil Panduro, who fully supported me throughout the whole process of this thesis with useful feedback, felicitous remarks and were always keen on listening to my problems, concerns and questioning. I would also like to thank my family and friends for their precious help and support during this whole process. I know I was not the kindest person to deal with the last 6 months and I would like to thank them for their understanding. This report is the final step towards my Master degree. This thesis reflects everything I have been taught during the last two and a half years not only in Copenhagen, but also in Melbourne, Australia. I feel obliged to thank all the people that our paths crossed into this long, but indulgent journey, because one way or another they all affected my life. 6 Applying the Hedonic Pricing Method and Cost Benefit Analysis to sand- feeding projects - An empirical pilot survey in Gribskov Municipality List of tables Table 2.1 – Classification of goods according to their excludability and rivalry….27 Table 5.1- N.P.V. with different discount rates……………………………………51 Table 5.2- N.P.V. with different discount rates (dead-weight loss included)……...52 Table 6.1 – N.P.V. of the project with and without dead-weight loss……….…….54 7 Applying the Hedonic Pricing Method and Cost Benefit Analysis to sand- feeding projects - An empirical pilot survey in Gribskov Municipality List of figures Figure 2.1 – Equilibrium in a hedonic price market……………………………..…21 Figure 3.1 – Gribskov Commune…………………………………………………...31 Figure 3.2 – The west side of Gribskov Commune…………………………………31 Figure 3.3 – The east side of Gribskov Commune………………………………….32 Figure 4.4.3.1- Dead-weight loss with indirect taxes……………………………….46 Figure 4.4.3.2- The change in the welfare of society by imposing an income tax….47 8 Applying the Hedonic Pricing Method and Cost Benefit Analysis to sand- feeding projects - An empirical pilot survey in Gribskov Municipality Chapter 1 - Introduction The Municipality of Gribskov (Gribskov Commune) is a Municipality in Capital Region (Region Hovedstaden) that covers an area of 278 km (28.000 ha)(Gribskov Commune, 2004). It is in the north area of Copenhagen, Denmark. The northern part of the Municipality used to be full of sandy beaches for several kilometers. The inhabitants of the Municipality (and not only those ones) used to spend most of their weekends and summer holidays there enjoying the sea and the sand. Also, they have bought or rented summer houses next to the beaches in order to be able to stay there as much as they want to. Those houses contribute to half of property taxes in the municipality with almost 200 million DKK per year (Wandall, n.d., a). As it is easily understandable characteristics such as distance from beach, amongst many others, are affecting the price of the house in the real estate market. Picture 1.1 - Gribskov Municipality as it is presented on its webpage. You can see all the forests (areas in green color), the lakes (areas in blue color), railways (the black lines), of course all the summer houses that there are in the Municipality (the black dots) and the different names of the areas of the Municipality. Unfortunately, over the last years due to strong winds and sea tides the sand has been removed from the beaches and has been transferred on the eastern side of Gribskov where the new harbor is (Gilleleje). As a result, most of the beaches nowadays have no sand at all and they are full of huge or small rocks. There is no need to mention that rocky beaches are not attractive to swimmers or fishermen and of course, they are not safe for kids to play around. This leads to houses being 9 Applying the Hedonic Pricing Method and Cost Benefit Analysis to sand- feeding projects - An empirical pilot survey in Gribskov Municipality abandoned and those ones available for renting to being unwanted. Moreover, this area’s income is based on tourism. Restaurants, cafes, little shops, are all based on money brought in the area by the owners of the houses or the people coming to Gribskov for holidays. It is easily understandable how disastrous the sand deficiency from its beaches is for the Municipality of Gribskov. Keep in mind that the municipality’s annual tourism revenue is 1,056 million DKK (Wandall, n.d., b)! Here are some pictures taken in the area of Gribskov Monucipality showing the situation in June 2013: Pictures 1.2 & 1.3 - Taken by the author on June 2013 showing sandy beaches in the Gribskov Municipality Pictures 1.4 & 1.5 - Taken by the author on June 2013 showing rocky beaches in the Gribskov Municipality For more pictures showing the situation nowadays see Appendix II. 10 Applying the Hedonic Pricing Method and Cost Benefit Analysis to sand- feeding projects - An empirical pilot survey in Gribskov Municipality Therefore, the Municipality decided to do something in order to face the problem. In the past the Municipality made some protection installations, but sand is a prerequisite for their efficiency. Here is a picture of those installations, so that you can have it in your mind: Picture 1.6 - Picture taken by the author on June 2013 presenting the coast-protection installations. For more pictures see Appendix II So now, as it is described by Jacob Wandall (Wandall, n.d., c) in his report “Oplæg til specialeemne: Cost Benefit Analys/Værdisætningsanalyse - Sandfodring i Gribskov kommune” (Translated in English: Launching a thesis topic: Cost Benefit Analysis / Valuation Analysis - Sand Feeding in Gribskov municipality) [Appendix I], it is their desire to do sand-replanting once a year in order to reset the coastlines to their previous standards. Their plan is to rent a ship which will sail across the beaches and it will throw away enough sand to restore the coastline and thereafter, once a year the ship will replant as much sand as it is necessary for the coast to be maintained. Wandall has estimated that this project will cost 100 million DKK for full recovery of the beaches over a 3-year period time and afterwards 5 million DKK per year for maintenance (Wandall, personal communication). There is but one thing left, which is to decide if they will proceed with the project or not.