Staying afloat: The effect of algae contamination on Lake Erie housing prices

Lake Erie has experienced unprecedented harmful algal blooms since the early 2000s, prompting the 2012 Great Lakes Water Quality Agreement between the United States and Canada, which aims to reduce lake‐wide phosphorous loadings by 40%. Little is known about the economic benefits from this agreement, especially to near lake homeowners. We provide key information on the benefits of harmful algal bloom cleanup by linking housing transactions in 2003 to 2015 from seven Ohio counties bordering Lake Erie with measures of water quality using remote‐sensing images. We further control for endogenous algae production using instrumental variables derived from hydrological processes that link Maumee River runoff to nutrient concentrations in Lake Erie. Using a semiparametric approach, we find the impact of harmful algal blooms on housing prices is spatially limited to properties within 1.2 km of Lake Erie. For the average near lake homeowner, a 1 μg/L increase in algae concentrations is expected to decrease property values by 1.7% ($2205). In aggregate, fulfilling the Great Lakes Water Quality Agreement will provide a yearly benefit of up to $42.9 million, fully covering the current annual expenditure on water quality improvement.