What are the Welfare Costs of Shoreline Loss?

Housing Market Evidence from a Discontinuity Matching Design

Many sections of the U.S. coastline are severely eroding. The average long-term rate of shoreline loss along the New England and mid-Atlantic coasts is 1.6 feet per year, with much higher rates in areas such as southern Nantucket Island in Massachusetts (12 feet per year) and the southern portion of the Delmarva Peninsula in Maryland (9.5 feet per year). In Florida, some segments of beach lose as much as ten to twenty feet per year.

Under current predictions of a 1.1 foot rise in average sea levels by the year 2100, these erosion rates will accelerate, and between 3,000 and 7,000 square miles of dry land could be lost. Although it is possible to protect coastal areas from shoreline loss—through installation of hardened features such as seawalls and groins, imposing set-back and minimum-height home construction requirements, and performing periodic nourishments to place new sand onto eroded beaches—the costs are substantial.

For example, the Florida Department of Environmental Protection projects that 1.1 billion dollars would be needed between 2011 and 2015 for full implementation of the state’s strategic beach management plan. Surprisingly, given both the substantial costs of preventing coastal erosion and the serious risks posed by retreating shorelines and rising sea levels, there is little rigorous evidence on the benefits of wider beaches for coastal property owners. Existing studies suggest that the sale price of a coastal home increases between $70 and $8,000 per one foot increase in beach width.

However, since cross-sectional hedonic property value regressions suffer from well-known theoretical and econometric problems, the interpretation of these estimates is not clear. Coefficients from hedonic regressions are biased when one of the housing attributes (such as beach width) varies over time. Furthermore, cross-sectional hedonic regressions are vulnerable to problems with omitted variable bias —as might be the case if higher quality houses are built along wider sections of beach.

This paper estimates the welfare costs of shoreline loss along coastal beaches in Florida using three distinct research designs that each solve both of the theoretical and econometric problems discussed above. These research designs are: (1) a repeat-sales regression of housing prices on beach width that controls for fixed housing characteristics and aggregate housing market shocks;(2) a differences-in-differences approach based on the sharp and substantial discontinuity in beach width caused by beach nourishment projects; and (3) a new “discontinuity matching” approach that exploits capitalized housing price differentials created by government policies that result in predictable changes in future beach width. These three research approaches seriously consider the problem of giving a theoretical interpretation to the estimated coefficients.

Matthew Ranson was the recipient of the Joseph Crump Fellowship for 2010-2011. Established at the Harvard Kennedy School in 1985, the annual Joseph Crump Fellowship provides support for a Harvard doctoral candidate conducting research on the environment, natural resource management, energy policy, or the intersection of energy and the environment.

Matthew Ranson received his Ph.D. in Public Policy with special fields in environmental and behavioral economics from Harvard University in 2012. The research for this paper was conducted during his tenure as a Crump Fellow. The Crump Fellowship is administered under the auspices of the Environment and Natural Resources Program of the Belfer Center for Science and International Affairs and the Mossavar-Rahmani Center for Business and Government.