Course:ECON371/UBCO2009WT1/GROUP5/Article2
How Much More is a Green Home Worth?
Summary
The article states that although there has been a lot of hype in green production techniques over the years, this is less reflected in consumer home purchases. The author compares the green housing market to the market for hybrid cars and claims that nobody would have purchased these cars because of the extra costs implicated, if it was not for the tax credit to help cut costs. The National Association of Homebuilders released a survey recently which showed that green production is less of a concern then cost effectiveness. Being that, consumers’ would be willing to pay more for a home that would cost less in the long run. The examples being that energy efficiency is a very major determining factor in the mind of a real estate purchaser. Whereas a house made out of fully recycled materials may be desirable to some but the costs would outweigh the benefits to many. The survey showed that more than half of people who were willing to pay for green features on their homes, would not be willing to pay greater than a 2% increase. It also indicated that builders throughout the United States claim that only 11% of customers ask about environmentally friendly features. The author worries that producers and politicians may overestimate the market demand for homes with green features and develop more into what he claims is a “glutted market”.
Analysis
Willingness to Pay for Conventional and Greener House
The curve WTP1 represents willingness to pay for conventional (non-green) houses. The red point shows the equilibrium between MC and WTP1 for the sale of conventional houses. The curve WTP2 represents what consumers would be willing to pay for a “greener” house. The arrows represent the 2% increase in cost associated with green outfitting. The green point on the MC curve is the cost of outfitting a truly green house. This point is outside of consumers’ willingness to pay.
A survey done by the National Association of Homebuilders showed that consumers would only be willing to bear a 2% increase in purchase cost for the sake of a green home. This 2% increase is unlikely to cover the costs of making a truly eco-friendly home. This is because green construction techniques such as using recycled materials can be much more expensive than conventional techniques.
Supply and Demand for Housing Market
The curve S1 represents the supply for the conventional housing market. The curve D1 represents demand for conventional housing. The blue point represents the equilibrium that conventional houses are sold at. The Curve S2 represents the more costly supply of the green housing market. The curve D2 represents the less steep demand of the green housing market. The red point shows the equilibrium for green housing to be sold at. The arrow represents the 2% increase in cost. The green point is where the NAH worries that home builders are developing because of poor judgment of the green housing market.
The National Association of Homebuilders conducted and released this survey because they felt home developers were overestimating the consumers’ desire for green housing. They also wanted to bring this to the attention of politicians because of the fear that policy change would push production of green houses up to the green point. Producing at this green point for either reason would lead to producer surplus and create inefficiency.
Environmental Quality and Public Policy
The above analysis shows the indication of the inefficiency for Green house. However, A Washington State policy suggests the different aspect of the Green Building. The DC government enacted legislation that requires all publicly-funded new building construction to meet various LEED requirements. (LEED stands for Leadership in Energy and Environmental Design.) The DC government enacted the legislation in aiming at protecting Washington's air, land and water.
Under the new law, all major public agency facilities exceeding 5,000 square feet, including school buildings receiving state funding, would be required to meet the green building council's LEED standards. For example, the Washington Middle school project is estimated to bring the increase of the energy savings in a number of ways. It will increase the energy savings such as 500,000 gallons of water each year and providing healthier air quality for students using natural ventilation in classrooms, thereby saving $1,200 a year in stead of air conditioning. The State Board of Education and Superintendent of Public Instruction's office estimates 20% savings in energy cost each year, 20% reduction in water cost, 38% in waste water production, and 22% reduction in construction waste through sustainable design buildings. These energy savings will move the society toward social efficiency due to the DC government’s environmental policy and might reveal the justification of the public policy for the improvement of the environment.
Reference
http://dslbd.dc.gov/olbd/cwp/view,A,3,Q,639915.asp
Green House in Long-Run Perspective
In addition to environmental benefits, greater energy efficiency can save money, since consumers who use energy more efficiently will pay less for eletric, gas and and other energy-related expenses. And also it will increases the ultilities of consumer. In short-run, consumers' ongoing expense is larger than expected value of green house, people are prefer to buy a conventional house rather than a green house, so the demand for the green house in the green housing market decrease. In long-run, buyers will see that the expected value of green house largely excesses expenses, and reach to a higher life standard. More and more people are willing to do this kind of investement. Therefore, the increasing in demand for green house will greater than the decreasing, and the price of green house will be sold at a higher price in the furtrue.
Prof's Comments
Very nice analysis of the two markets. The government policy you described is an example of shifting out the demand for green building. Another policy option is reducing the cost, through incentives similar to what was being offered for high fuel efficiency vehicles. This would shift out the supply curve. The two percent premium represents what an individual owner is willing to pay, but it fails to capture the external benefits - if there are external benefits - of greener buildings.