The excess burden associated to characteristics of the goods: Application to housing demand

This paper shows that conditional subsidies aimed at certain kinds of goods do not merely generate the traditional excess burden: there is an alternative welfare loss as the distortion affects good characteristics rather than prices. We provide empirical evidence of the welfare loss after estimating a linear hedonic price model and using predicted prices in a quadratic almost ideal demand system for housing characteristics. We identify the sources of the losses and we also provide a monetary measure that suggests that, under plausible parameter values, it can be quantitatively high.