Economic Development and Public Finance Working Paper Series

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Over the past 25 years, researchers in the social sciences and public policy fields have grown increasingly interested in how environmental valuation affects human behavior and settlement patterns. Specifically, quality of life—broadly interpreted as the satisfaction a person derives from surrounding conditions—is understood to influence the economic decisions of households and firms alike, including where to locate, in what spatial configuration, and at what cost. While it is not clear that the two groups always value the same factors (Gabriel and Rosenthal 2004) it is well known that environmental conditions matter to both in important ways (Bartik and Smith 1987; Gyourko et al. 1999; Mulligan et al. 2004). In fact, quality of life is so fundamental that it has become a primary driver of the growth process and, as a result, helps to determine places’ competitive advantage. What explains the role of environmental valuation in people’s decisionmaking processes? How is it observed? And, what implications do the theory and evidence hold for planners and other policy makers responsible for guiding the path of urban and regional development?

This paper responds to these questions by: (1) describing, in plain terms, how quality of life is valued and reviewing some key pieces of supporting evidence; (2) using an econometric analysis to illustrate how environmental conditions affect place-to-place variation in the cost of living; and (3) suggesting how and why public policy should respond. While there is some discussion of firms and employment, the primary goal of the paper is to introduce the concept of environmental valuation and its implications for household behavior from an interregional perspective. The empirical component involves an analysis of the relationship between median household income and median housing value across the continental United States. In the first step, the error term from a bivariate regression equation is used to identify locations where people pay a premium (discount) to live due to a high (low) quality of life. In the second and third steps, an additional variable—the USDA’s natural amenity index—is added into the original equation in order to examine how unexplained variation in the local cost of living is affected and then identify the areas of the country where the natural environment matters the most. The analysis, although only exploratory in nature, highlights the importance of quality of life to the contemporary economic landscape.