Econometrics Using data from 1988 for houses sold in Andover, Massachusetts, fro
ID: 1169542 • Letter: E
Question
Econometrics Using data from 1988 for houses sold in Andover, Massachusetts, from Kiel and McClain (1995), the following equation relates housing price (price) to the distance from a recently built garbage incinerator (dist): Interpret the coefficient on log (dist). Is the sign of this estimate what you expect it to be? Do you think simple regression provides an unbiased estimator of the ceteris paribus elasticity of price with respect to dist? (Think about the city's decision on where to put the incinerator.) What other factors about a house affect its price? Might these be correlated with distance from the incinerator?Explanation / Answer
Answer i:
The coefficient of log( dist ) signifies the estimated elasticity of price with respect to distance. It indicates that even 1% increase in distance from garbage incinerator has direct effect on price of the property i.e. the housing price increases by 0.312%. It only further signifies that population does not prefer staying closer to the garbage incinerator.
Answer ii:
No, we think simple regression provides a biased estimator of ceteris paribus elasticity of price with respect to distance. We think there are many other factors that can influence housing price other than proximity to garbage incinerator.
Answer iii:
Other factors like the location, current market rates for the property in that location, quality of the property and environmental issues affect the housing prices.
Location has the positive correlation with the distance from garbage incinerator since people would not buy the property that is located near to garbage incinerator. Hence housing price decreases due to less demand.
Environmental Issue is the other influential factor having positive correlation. Environmental issues like health hazards, air pollution arise in the areas with garbage incinerator. This again decreases housing prices.
The other two factors do not have correlation with garbage incinerator.
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