Have access to clean water and a functioning sewer system is something that many Americans take for granted. Not all Americans, of course, especially those in rural areas not connected to an urban water system. But most Americans do. But how much is it worth?
It’s a hard question to answer. We know clean water and sewers probably have large effects on disease transmission. For example, Ferrie and Troesken (2008) looked at several major improvements in Chicago’s water system, and found that there were large declines in mortality from diseases like typhoid fever after the improvements (here’s an ungated working paper, with the much better title “Death and the City“). But the limits of earlier studies like this are that they primarily looking at a time series of mortality rate and relating this to some change in public infrastructure. A good attempt, but perhaps not convincing to everyone.
A better method would be to look at not mortality rates but property values. People are, surely, willing to pay more for a home with piped water and a sewer system. But how much more? Knowing this could give us better information on the value of the water systems. And that’s exactly what the authors of a new working paper do, once again visiting Chicago in the nineteenth century to look at how much property values increased after the installation of water and sewer systems. The paper is “The Value of Piped Water and Sewers” by Coury, Kitagewa, Shertzer, and Turner (ungated version).
The effects are huge. There most conservative estimate is that sewer and water systems doubled property values (a 110% increase), but the effect could be much larger (almost 4 times as much, if I am reading it correctly, under other reasonable assumptions).
People are willing to pay a lot for sanitation, it turns out.
Not only is this a huge increase in land values, it vastly exceeds the cost of constructing the sewers, which were about $4.3 million during this period in Chicago. Once again, using the conservative estimate, the increased property value was about $69 million, about 16 times the cost of construction. But using their larger estimates, the value could be as much as sixty times the cost of construction.
This seems a public works project which clearly has benefits in excess of the cost. But how was it paid for? In Chicago at the time, they used a form of taxation that is still familiar to us today: bonds were issued, secured by the value of the property and future property taxes that would be paid. This is a form of what John Wallis has called “benefit taxation,” where the primary beneficiaries of a new public project are also the ones that pay for it: the nearby property owners, who would presumably see their property values rise (indeed, they did in spades in the case of Chicago).
The authors employ a number of techniques to make the case that these effects are indeed causal, and not caused by some other changes in society. For example, property values could be rising because roads were being built instead of the water systems, which indeed was happening simultaneously. How do we know it was the water improvements and not other improvements that caused property values to rise?
Most importantly for their causal identification strategy, the authors use the variation in the grade of the land. Especially for the construction of sewer system, grade is key in determining cost. For land with a natural grade, constructing a sewer system is cheap. Water flows downhill, and gravity does the work. If the land is flat (as much of Chicago is), you have do a lot of the grading, which is costly and takes time. But what is important in their paper is the variation in grade across the city, which delayed the construction of sewers in certain areas. Variation in grade is also not important for when roads were constructed, getting around the problem mentioned in the prior paragraph.
What really makes this paper shine is the excellent data the authors have obtained. They have microdata on the value of individual parcels of land, as well as detailed maps showing were piped water systems. By combining these two pieces of historical data, they are able to make the kinds of credible estimates that they do in the paper. Allison Shertzer, one of the co-authors on this paper, is really a wizard at finding old maps and combining them with other data sources to answer important historical questions, such as in her series of papers on housing markets and segregation with Randall Walsh and other co-authors.
As a final note, while benefit taxation was the method used for constructing water systems in Chicago and other cities, it was not the only method of finance used. Many systems were privately constructed. Troesken and Geddes (2003) look at data for over 700 private water systems in the US in the late nineteenth century. Many of these were later municipalized, and they find that this was not usually done for regulation-based or public interest reasons.
So, the next time you flush your toilet and it works (which it almost always does), be sure to remember that your home is probably worth at least twice as much as it otherwise would be thanks to the humble toilet and the invisible sewer system it is connected to.
Economist Writing Every Day 