Research / Funded Research Projects / Project - 2 - Valuing Agricultural Land Assets in the System of National Accounts: A Hedonic Pricing Approach

Project - 2 - Valuing Agricultural Land Assets in the System of National Accounts: A Hedonic Pricing Approach

Location: University of McGill 
Research Team: Paul J. Thomassin
Duration: 18 Months

Problem

Over the last three decades increased emphasis has been placed on taking into account the impact on the environment, and natural capital in particular, in public decision-making with the concept of sustainable development. The importance and role of natural capital generated a debate in the economic literature over the degree of substitutability for natural capital with the concepts of weak and strong sustainability. The common element with both weak and strong concepts of sustainability is the principle that there is a need for the long-term maintenance of the capital stock. The implication for natural capital differs, however, depending on which of these extreme positions is taken or whether one falls on the continuum between these extreme positions. On a practical note, considerable effort has been put into linking the economy with the environment through a system of accounts (Statistics Canada 2006; UN 2003) which would augment the current system of national accounts.

The maintenance of capital, and specifically natural capital, is particularly relevant for the agriculture sector and for agricultural policy makers. The agricultural land resource base is important for the overall profitability of the sector. Policy makers should be taking into account changes in the quantity and quality of the agricultural land resource in the development of agricultural policy. Linking the natural capital; i.e. the agricultural land resource base, with the system of national accounts; i.e. the economy, is one means of identifying this impact.

Linking the agricultural land resource base, i.e. the natural capital, to the economy requires that the agricultural land resource base be considered as an asset account where changes in the asset can be accounted for in both physical and monetary terms. In order to do this, the asset account requires an opening inventory of agricultural land and a closing inventory that can be measured in physical terms; both quantity and quality. The opening and closing inventories can then be valued and the change in inventory can be valued. Estimating the change in the value of the natural capital asset is important because it is policy relevant to decision-makers, is more readily applicable to policy decision-making, and has long term implications for the sustainability of the sector.

The study will be innovative in terms of the method used to value the opening and closing inventories of agricultural land. A hedonic pricing approach will be used to estimate the value of the agricultural land inventory. Hedonic pricing is a means of estimating the implicit price of the attributes of a good (Hidano 2002; Haab and McConnell 2002). Hedonic pricing uses market 2 data to estimate the implicit prices of the attributes, and thus is a reveal preference approach for valuing the inventory; i.e. the natural capital.

The following procedure will be used. First, the opening and closing inventories of agricultural land in Quebec will be estimated. This will include both the quantity and quality dimension of the agricultural land resource base. Second, arms-length agricultural land transactions from across the province will be collected. Third, the quantity and quality of the agricultural land involved in the transaction will be identified through a GIS procedure that links the location of the agricultural land transaction with soil productivity of the land. Fourth, a hedonic pricing model will be estimated that will estimate the implicit price of the characteristics of the agricultural land. Fifth, the opening and closing inventory of the agricultural land resource base will be valued with the implicit prices estimated from the hedonic pricing model. Sixth, the change in the value of the agricultural land asset account will be estimated and policy implications will be identified.

In-Kind Contribution – McGill University. McGill University will provide access to the GIS software and various maps, in addition to office space, libraries, etc.

References:

Habb, T.C. and K.E. McConnell. 2002. Valuing Environmental and Natural Resources: The Econometrics of Non-Market Valuation. Cheltenham U.K.: Edward Elgar.

Hidano, N. 2002. The Economic Valuation of the Environment and Public Policy: A Hedonic Approach. Cheltenham U.K.: Edward Elgar.

Statistics Canada. 2006. Concepts, Sources and Methods of the Canadian System of Environmental and Resource Accounts. Ottawa. Cat. No. 16-505-GIE.

United Nations. 2003. Handbook on National Accounting: Integrated Environmental and Economic Accounting 2003. Series F, No. 61,Rev.1(ST/ESA/STAT/SER.F/61/Rev.1).