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WILLINGNESS-TO-PAY FOR IMPROVEMENT OF AIR QUALITY IN JAKARTA, INDONESIA
Dollaris R. Suhadi; Department of Environmental Management, Faculty of Environmental Studies, Universiti Putra Malaysia

ABSTRACT

A study to obtain people’s willingness-to-pay (WTP) for an improvement of air quality in Jakarta was conducted in 1999 using two methods, i.e. direct method (contingent valuation) and indirect method (indirect utility function). Direct method values public goods (air quality) explicitly from individual expressions about the price of air quality in a hypothetical market. The price of air quality is revealed by asking individual about their WTP for an improvement of air quality. Indirect method calculates the price of air quality from demand function of market goods related to air quality. The demand function is developed from 2 market goods, i.e. housing and medical services. It is assumed that air quality affects housing prices and expenditures on preventive and medical care associated with the effect of pollution on health. Primary data was collected from a household survey in Jakarta involving 1000 samples, classified into 3 socioeconomic groups based on expenditures per capita per month. Heads of household were interviewed. The overall response rate was 96%; 4% refused to be interviewed. Following the survey, data were analyzed using descriptive statistics and translog utility function model. The results of the direct method revealed that people’s average WTP for 25% and 50% improvement of air quality (from the 1999 condition) were Rp.21,293 (US$ 2.84) and Rp.31,938 (US$ 4.25) per year respectively. Using the utility function model, WTP for 25% and 50% improvement were Rp.11,045 (US$ 1.47) and Rp.21,463 (US$ 2.86) per year respectively. From the test of hypothesis for two WTPs, it was concluded that the difference between two WTPs was significant at both 95% and 99.9% confidence level. The difference between the two WTPs was mostly caused by: 1) the annual land and building tax rates, which was used to represent housing prices were found to be not consistent, and 2) medical service prices imputed in the indirect utility function were merely rough figures for all illnesses combined, therefore the model required control variables which included health attributes of the respondents or household members that were associated with air pollution. However, these control variables were unable to fit into the model since it resulted in negative sum squares. Although there was difference between the two WTPs, for approximation the two methods could be used. The regression analysis indicated that household income, land and housing sizes, living duration, respondent’s illnesses, employment status, education and visit to doctor/medical unit affect people’s WTP in Jakarta. Improvement of the empiric model and survey database in the future is necessary.

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