TOOLS FOR RESOLVING PUBLIC OPPOSITION TO PROJECTS

by Kenneth Acks

Real Estate Review (Spring, 1995)

Copyright 1995

I. INTRODUCTION

Throughout the U.S. huge amounts of time and money are wasted in battles over proposed projects. The Not-In-My-Backyard "NIMBY" syndrome is costing society billions of dollars by blocking badly needed public improvements--ranging from drug treatment centers, to prisons, to waste disposal facilities, and to transit links. Hundreds of lawsuits are clogging the courts, and opportunities to employ and house countless individuals are missed.

Several famous battles were fought by neighborhood groups in the nineteen-eighties. These conflicts involved "Westway", the Shoreham Nuclear Power Plant, prison construction proposals, "group homes" for the mentally ill and redevelopment projects in Downtown Brooklyn, Columbus Circle, and Times Square. The regional recession, which began after the stock market crash of 1987, killed many projects, and NIMBY receded from the front pages. However, community opposition has continued, and a rebounding economy will once again put developers and community groups on a collision course. Recent disputes include the failure of states to provide for the storage of radioactive waste, lawsuits over "cancerphobia" generated by power lines, opposition to offices for the Canon Corporation in Brookville and Melville Long Island, the movement to combat "environmental racism", the bitter dispute over the proposed Disney Park near Bull Run, opposition to a proposed rail link for airports in Queens, a battle over roadside sound barriers in New Jersey, the fight against a garbage dump in Sag Harbor, a lawsuit against the Village of Dobbs Ferry for the right to install cellular phone antennas, environmental opposition to NAFTA and GATT, and the call for an immediate ban on the burning of oil spill debris at the Hempstead Resource Recovery Facility. Dozens of other conflicts could be listed.

The duration and intensity of the battles arises, in part, from the difficulties involved in quantifying damages and benefits resulting from projects. Give and take is difficult when neither side knows what it is giving or taking. What is the value of clean air, of water rendered unavailable for recreational uses, of rapid access to airports, of housing for the poor, of freedom from crime, or of a job? And, conversely, what are the costs of noise near an airport, of congested streets, and of lungs damaged by air pollution? Whereas the private sector can examine prices and profits to measure the costs and benefits of its actions, the public sector can rarely quantify all significant gains and losses resulting from alternatives. If the costs and benefits were known then injured parties could, in principal, be compensated by beneficiaries or government. Or, costly projects might be halted if the measures indicate that overall costs exceed overall benefits.

We will discuss below ways in which damages and benefits have been quantified, and how better measurements can be used to resolve conflicts. A recent Supreme Court Decision indicates that courts will require such measures to a greater degree in the future. On June 24th, 1994 in Dolan v. City of Tigard the U.S. Supreme Court ruled that requiring a public easement as a condition of permission to build or expand is an unconstitutional taking unless the government can show a "rough proportionality" between the requirement and the particular harm posed by the development, like increased traffic or a heighten danger of flooding. The newest Supreme Court Justice Stephen Breyer has been a passionate advocate for the use of economic analysis to balance risks and benefits indicating that similar decisions can be expected in the future.

II. HEDONIC VALUATION TECHNIQUES

Over the past three decades economists have developed several tools to evaluate costs and benefits. "Hedonic Valuation Techniques" estimate the pleasures that individuals derive from goods, from characteristics of goods, from natural resources, or from particular aspects of health. These techniques are most commonly employed when markets and prices do not exist, or where distortions cause prices to deviate from true values. Through hedonic valuation economists attempt to determine how much individuals would be willing to pay for deriving benefits, or willing to accept for being exposed to harmful environments. Some of these techniques can produce questionable results, even if they are applied scrupulously. But they are often the only means to determined values and damages.

Eight types of data have been employed (along with statistical methods) to estimate implicit valuations: 1) property value differentials, 2) survey questionnaires (the "contingent valuation" method, 3) wage premiums for dangerous jobs, 4) insurance premiums, 5) travel cost data, 6) public expenditures, (7) laboratory experiments, and 8) expenditures on safety equipment.

1. Property Value Studies

Property value studies assume that the presence of amenities and disamenities is capitalized into prices of real property. Homes in areas with low levels of noise, air pollution, crime, etc. will fetch higher prices. By holding other factors constant property prices provide a strong indication of value for individual goods. Changes in property values can be evaluated in two different ways. The first mode of analysis involves classical real estate appraisal.

A. APPRAISALS

Real estate appraisals attempt to derive market value Appraisers generally use three approaches: The Cost Approach, Sales Comparison, and the Income Approach. All three approaches use information on market transactions to derive value conclusions.

The Cost Approach is based upon the premise that the value of a property is approximated by the investment necessary to replace that property. The Sales Comparison Approach is derived from sales of properties similar to the subject, each of which is compared to the property appraised and adjusted to reflect the estimated influence of various characteristics. There are two basic forms of income approaches: 1) Income Capitalization and 2) Discounted Cash Flow. Income Capitalization is a process of measuring the future income and translating this income into a total value via capitalization. Discounted Cash Flow Analysis incorporates year-by-year projections of income and expenses, discounts these cash flows by an appropriate rate, and adds the present value of a sale at some future date.

Real estate appraisers can thus attach values to projects and disamenities by applying the three approaches, and incorporating information on costs to remediate disamenities. Appraisers can include the costs to decontaminate land and buildings into cost and income approaches. They also can attempt to find sales of properties affected by toxic chemicals and compare these to sales of uncontaminated properties.

B. HEDONIC REGRESSIONS

However, appraisal samples tend to be limited, and are subject to ad hoc adjustments. Economists have attempted to overcome the problems associated with small samples by using "hedonic regression analyses". Regressions test theoretical propositions regarding relationships among variables, and estimate the degree to which one variable influences another. Researchers thus specify functional relationships between two or more variables depicting one as dependent because they expect that it will respond to one or more independent variables.

Hedonic regression analyses regress the price of differentiated goods on quantities of characteristics or attributes associated with each good. Under this approach researchers take a large sample of properties and examine the relationship between sale prices and the degree of pollution, the number of bedrooms, the size of the lot, the local crime rate, reading scores, accessibility of employment, and many other variables. Variables employed to explain prices include factors pertaining to individual buildings, and neighborhood influences. The relationship may look something like this:

From this graph it is apparent that high levels of pollution (say sulfur dioxide) tend to be associated with low home prices. Regressions essentially draw a line (or a curve) through the middle of the dots, minimizing the distance between the line and the dots. The slope of the line determines the extent of the reductions. A steep line indicates a large effect, while a slow descent reflects a mild influence. The economist can then conclude that a 10% increase in air pollution is associated with a 1% fall in property values--and is thus worth say $1,000 per home. Regressions constitute the best means available to systematically evaluate causation, and to incorporate the influences of the many factors that affect property values.

To date hundreds of these studies have been conducted. Among the disamenities considered in these analyses are the presence of air pollution (i.e. sulfur dioxide, ozone, or dust particles), of airport noise, of water pollution, of nearby nuclear power plants, of public housing projects, of crime, of poor schools, and of inaccessibility.

Table 1, below, presents the results of a classic hedonic regression analysis conducted by Jon Nelson (1975) in the Washington, D.C. SMSA. Nelson derived the following results:

TABLE I

This equation shows that if one room is added to a 100 room mansion the value should increase 1.5%, assuming this relationship would hold for such a house. Additional manipulation of data in the study shows that one extra room in a typical house is worth approximately $6,800. Similarly, if the level of oxidants per million particles of air increase 100% property values should be expected to fall 1.7%. Thus, the owners of a $100,000 home, may be entitled to compensation of $1,700 if a new manufacturing plant increases oxidant pollution by 100%. Likewise, real estate appraisers should consider adjusting comparable sales in areas with twice the level of oxidant pollution downward by 1.7%. Marginal values for these traits can also be derived.

Based upon regressions utilizing data gathered near toxic waster sites, Smith and Desvouges (1986) concluded that the value of moving an additional mile away from a hazardous waste dump was between $330 and $495.

The following table presents a small sample of findings from other studies regarding percentage changes in property values resulting from 1 percent increases in disamenity or amenity levels.

TABLE II

Thus, Krumm's result suggests that a 1 percent increase in reading scores relative to the national average as measured by the California Achievement Test is associated with an increase of .23% in home values. The value of a $100,000 home should increase $230 if reading scores can be raised 1 percent.

Naturally, these results must be interpreted with care. Many criticisms have been leveled at hedonic regression analysis. First, regression studies do not incorporate the in-depth knowledge of properties available to appraisers and significant elements of value such as financing or aesthetic appeal are generally not available. Common sources of bias arising in hedonic regressions include: 1) omission of significant variables, 2) inappropriate samples, 3) incorrect functional specification of relationships, 4) difficulties in separating demand and supply factors (the identification problem), 5) multicollinearity, which produces distortions in results arising from correlations between explanatory variables, and 6) the possibilty of multiple equilbria. In addition, all regression analyses are subject to a number of potential distortions including "heteroskedasticity", "autocorrelation" of errors, of "simultaneity bias". The difficulty of specifying functions correctly may be the most serious shortcoming as relationships can take an infinite variety of functional forms. Generally, relationships are assumed to be linear. However, a linear relationship is not proper when researchers attempt to determine the effect of distance from a landfill, or hazardous waste site. Homes within one quarter mile of such hazards may suffer huge declines. Homes slightly beyond this range may face some loss in value, but the losses will be far less precipitous than for houses very close to the hazard. Skilled researchers can utilize advanced techniques to devise appropriate specifications.

2. CONTINGENT VALUATION

The contingent valuation method attempts to estimate values for public goods by asking individuals, in survey or experimental settings, to reveal their personal valuations of increments or decrements in unpriced goods by using hypothetical, contingent markets. These markets define very specifically the good or amenity of interest, the status quo level of provision, the offered increment or decrement, the institutional structures, and the methods of payment. They attempt to determine amounts that individuals would be willing to pay, or willing to accept, for preserving resources, or for accepting damages. Techniques range from purely hypothetical direct evaluations asking respondents for dollar bids, to hypothetical questions asked of households and recreators concerning changes in behavior to enable the imputing of their preferences. Households are confronted with possible changes in an environmental attribute and asked for a valuation.

The method was endorsed in 1992 by an advisory panel of economists including two Nobel laureates. Alaska used the contingent valuation method to calculate that the Exxon Valdez Oil spill had done nearly $3 billion in damage beyond the amount actually spent on cleanup. Brookshire, et. al. (1976) found that the average bid per family to prevent one additional power plant near Lake Powell was $2.77 in 1974 dollars.

On January 7, 1994 the National Oceanic and Atmospheric Administration said that although contingent valuation could be a valid tool for assessing environmental damage, it would be better to underestimate than to overestimate damage by relying too heavily on that method. The proposal suggested discounting by 50 percent the value that people attach to unspoiled resources, and would require exhaustive and expensive statistical tests among large numbers of respondents to validate results. Environmentalists argued that the proposal would fail to hold polluters fully accountable for the damage they cause and would not provide a strong incentive for prevention.

Such surveys are often the only means to estimate values. However, the method is controversial and is subject to several biases if not carefully applied. After all, it is easier to tell a researcher that one would be willing to pay $100 to save the spotted owl than to actually take that sum out of one's pocket which would provide a true indication of willingness to pay. Potential biases include (1) strategic bias, whereby the individual may attempt to influence the outcome or result by not responding truthfully, for example by stating that he or she would spend thousands of dollars to avoid a harmful event in order to prevent that event from ocurring; (2) information bias which results from a lack of significant information, such as travel costs, inherent in hypothetical surveys; (3) instrument bias, which results from the process used to discover preferences; (4) hypothetical bias which is due to the fact that respondents are not confronted with actual situations, (5) sampling bias, produced by an unrepresentative group of respondents, (6) interviewer bias whereby a respondent attemtpts to either please or gain status with a questioner, (7) non respondent bias, which indicates that the values of people who feel intensely about an issue will be overrepresented, as individuals that do not place a high value upon environmental goods may simply not fill out their surveys, and (8) vehicle bias which is based upon distortions resulting from the means of payment. Scenarios can also be misspecified as amenities and probabilities of provision may not conform to the issue at hand. Researchers have also noted a curious, large, and consistent disparity between willingness to pay to avoid harmful events and willingness to accept disamenities. In general results of studies have not been "robust", as estimated values of amenities have varied widely. Many clever means have been designed to surmount the above difficulties.

3. OTHER TECHNIQUES

In using insurance premiums and safety expenditures economists derive values by dividing the dollars that consumers are willing to pay for such goods and services as life insurance, smoke detectors, or automobile air bags by an estimate of risk reductions. For example, consumers might be willing to spend $20 for a smoke detector that has one chance in 100,000 of saving a life--which implies a value of life of $20/(1/100,000) or $2,000,000. Wage premium studies utilize multiple regression analyses in a fashion similar to hedonic property studies. Travel cost studies attempt to measure the value of parks, waterways and other free resources by looking at what consumers paid for travel in terms of gasoline, depreciation, and foregone wages. These studies then derive implicit valuations of the resources based upon the travel costs. Public expenditure studies assume that government spending accurately reflects desired spending levels. Actual public spending levels are then used to estimate the value that the public places upon various goods and services. Laboratory experiments isolate subjects in artificial environments and cause them to bid for various environmental goods such as unobstructed views. These experiments tend to be similar to contingent valuation studies.

Indications of additional economic benefits such as changes in jobs and income resulting from projects or regulations can be obtained through standard econometric and input/output models.

III. CONCLUSIONS AND RECOMMENDATIONS

These measures can then be used to estimate damages and benefits resulting from projects. Victims can then be awarded compensation from beneficiaries or from general government funds. To be sure, different methods and different researchers can produce widely varying results. In addition, parties might not accept the estimates as being indicative of their particular cases.

These estimates have been employed with increasing frequency. Both sides in the Exxon Valdez dispute utilized some of the aforementioned techniques. The battle over the Shoreham nuclear power plant was fought with experts citing conflicting estimates of damages using sophisticated techniques.

However, use of these tools has been the exception rather than the rule. "Environmental Impact Statements" tend to offer only isolated statistics, and rarely quantify the value of overall costs and benefits. The failure to employ the above mentioned benefit and damage estimates arises from the expense and time involved in measuring complicated phenomena. Given the heterogeneity of policies, costs, and benefits, interested parties seeking to comprehensively measure impacts must typically spend tens or hundreds of thousands of dollars, and wait months or years for the results. Decisions are thus based upon feelings and hunches--while victims, taxpayers and potential beneficiaries may suffer the consequences, or reap undue advantages. In order to expedite the estimates private firms and government agencies have begun to develop computer software designed to automate the cost benefit analysis process. However, current models are limited in scope. Given the scarcity of public funds, and the damage produced by faulty policies, government should devote more resources to improving existing systems.

In conclusion, vast amounts of time, money and natural resources could be saved by measuring damages more efficiently. It is time to bring the dispute resolution process into the final decade of the 20th century. Beneficial projects could be expedited, damaging proposal could be destroyed, and victims can be fairly compensated. However, the time needed to measure damages and the costs of these measures must be reduced if they are to be employed more frequently. Steps are being taken to reduce the time and money needed to estimate damages.

REFERENCES

Brookshire, David S., Thayer, Mark A., Tschirhart, John, Schulze, William D.; "A Test of the Expected Utility Model: Evidence from Earthquake Risks", Journal of Political Economy, Vol. 85, No. 2, 1985, pp. 369-389

Brookshire, David, Ives, B., and Schulze, William D., 1976. "The Valuation of Aesthetic Preferences." Journal of Environmental Economics and Management 3 (Dec.): 325-346

Cobb, Steven, "The Impact of Site Characteristics on Housing Cost Estimates", Journal of Urban Economics, Volume 15, 1984, pp. 26-45

Krum, Ronald J. "Neighborhood Amenities: An Economic Analysis", Journal of Urban Economics, Volume 7, 1980, pp. 208-224

Levin, Sharon, "Capitalization of Local Fiscal Differentials: Inferences from a Disequilibrium Market Model", Journal of Urban Economics, Vol. 11, 1982, pp. 180-189

McMillan, Melville L., Reid, Bradford G., Gillen, David W.; "An Extension of the Hedonic Approach Estimating the Value of Quiet", Land Economics, 1980, pp. 315-328

Nelson, Jon, The Economic Analysis of Transportation Noise Abatement, 1975, New York

Schulze, William D., D'Arge, Ralph C., and Brookshire, David S.; "Valuing Environmental Commodities: Some Recent Experiments", Land Economics, Vol. 57, No. 2, May 1981, pp.151-171

Smith, V. Kerry and Desvouges, William H., "The Value of Avoiding a LULU: Hazardous Waste Disposal Sites", Review of Economics and Statistics, 1986, pp. 293-299