A Guide for Cost-Effective0^s
.and 'Cost-Benefit ^mdysis^ of*;'
 State and Local 0rpmd
 Brotection Programs  /-
    ""   s >       "" ^**^      ^  '*'**"
                             Office of Water
           Office of Ground Water and Drinking Water
                  Ground Water Protection Division
               U.S. Environmental Protection Agency

                                April 1993
                         Printed on Recycled Paper

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                                           Acknowledgements
This document was prepared for the U.S. Environmental Protection
Agency, Office of Water, Office of Ground Water and Drinking Water
under contract no. 68-00-0083.  Ronald W. Bergman served as the task
manager for this project, with assistance from Charles Job.

      We would like to thank the following people for their assistance
in providing initial inputs for this project:

      Mr. Dusty Hall, Dayton, Ohio
      Mr. Ronald Olsen, Renton, Washington
      Mr. Stanley Miller, Spokane County, Washington
      Mr. Allen Trefry, Dade County, Florida
      Mr. Bernard Dworsky, New Castle County, Delaware
      Dr. Erik Lichtenberg, University of Maryland
      Dr. John Cumberland, University of Maryland
      Mr. Harry Hatry, The Urban Institute
      Ms. Elaine Morely, The Urban Institute
      Ms. Vanessa Leiby, the Association of State Drinking Water
          Administrators
      Mr. Jeff Posde, Wisconsin Department of Agriculture, Trade,
          and Consumer Protection
      Mr. Walt Pettit, State Water Resources Control Board,
          California

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                                                                           Contents
 Acknowledgements
 Preface

 1.     Introduction                                                                  j

       Why Use Economic Analysis?                                                  2
       What Expertise Do I Need to Conduct These Analyses?                           3
       Will I Need to Hire Consultants?                                               3
       How Should I Use This Guidebook?                                             4


 2.     Preparing for the Economic Analysis                                             7

       Define the Ground Water Protection Program                                     7
       Choose the Appropriate Method of Analysis                                      9
                  Cost Assessment                                                  JQ
                  Cost-Effectiveness Analysis                                        10
                  Cost-Benefit Analysis                                             1 j
       Define the Scope of the Analysis                                              j j
       Hypothetical Example                                                        12
3.     Establishing the Baseline
                                                                                  15
      Step 1:    Define the Baseline                                               16
      Step 2:    Quantify the Baseline                                              17
                 Baseline Costs                                                    17
                 Baseline Effectiveness                                             20
      Step 3:    Consider Factors that Increase or Decrease Baseline Estimations        20
                 Factors Affecting Baseline Costs                                    20
                 Factors that Influence Baseline Effectiveness                          21

      Step 4:    Incorporate Probability into the Baseline Calculation                   22
                 Incorporating Probability in Baseline Cost                            22
                 Incorporating Probability in Baseline Effectiveness                    23
                 Calculating Probabilities of Contamination                            23

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  Contents


        Hypothetical Example                                                      25


 4.     Assessing the Costs                                                        29

        Step 1:     Select the Costs                                                 29
                  Classifying the Costs                                             29
                  Choosing a Level of Analysis                                      33
      •  Step 2:     Select the Cost Estimation Technique                               35
                  Comparative Accounting                                          35
                  Modeling or Systems Engineering Techniques                        35
                  Surveys                                                        ~fi
                  A Combined Approach                                            37
       Step 3:     Estimate the Costs                                               37
                  Time Period                                                     37
                  Time Value  of Money                                            30
                 Incremental Costs                                               40
                                                                                41

       Case Study:  East Dakota Water Development District, South Dakota             46
          «• VA «ra*a^fiAM4
Hypothetical Example                                                      41
Case Study:  State of Washington
5.     Analyzing Cost-Effectiveness                                                51

       Estimate the Effectiveness of Program Options                                 54
       Evaluate Cost-Effectiveness             '                                    55
       Hypothetical Example                                                      57
       Case Study: State of Wisconsin                                           -   5g


6.     Analyzing Costs and Benefits                                                65

       Identify the Types of Benefits                                                65
       Estimate the Benefits                                                        6o
                 The Avoided Cost Method                                        70
                 Risk Assessment                                                 7g
                 Contingent Valuation                                             79
                 Hedonic Pricing                                                 g4
      Hypothetical Example                                                       86
      Case Study:  Suffolk County, New York                                       87

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 Contents
      Case Study:  Dover, New Hampshire                                         91

Glossary
Bibliography                                                                    ?r

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                                                                            Preface
      £   £ r Cost-E/ectlveness and Cost-Benefit Analysis of State and Local Ground Water
 Protection Programs is one of the first in a series of assistance documents that EPA will
 release in support of Comprehensive State Ground Water Protection Programs (CSGWPPs)
 S,l^oo?m^henSiV/ S^ Gr°Und Water V****™ p«>gram Guidance was released in
 rS™^'^     ^u^11 ""* StateS in devel°Ping Strategic Activity #2 of the
 CSGWPP Guidance, "Establishing Priorities."  States will need to establish priorities for
 ootn prevention and remediation activities under a CSGWPP.

       A CSGWPP will efficiently allocate resources according to the state's priorities in
 ground water protection through the coordination of federal, state, and local ground water
 ST* Bconoi?C8 ^ be used M a t001 for ^ective decision-making in this effort by
 S2£?t *? gr°Und Water *?*** manager to «wW« * program's full range of costs and
 Sli? t Z7mT. * an t°,be US6d l° justify ground water Protecti°n decisions to
 the public, the state legislature, or the federal government.

 tool, of™' gUlde Wm,  fammarize state ««d local ground water program managers with the
 tools of economic analysis. It will also show how these tools can be used to Evaluate ground
 water programs through (^-effectiveness or cost-benefit analysis.  Case studies slw fte
 practical application of cost analysis, cost-effectiveness analysis, and cost-benefit analysis   A
 bLbgraphy is included if a program manager needs further'information on any oT£e
              p    protection decisions «« made based on political, environmental, and
      ,        E?n°miCS 1S a w^ to helP choose ^ong options, or to determine the cost
or benefit of a certain option, but protection decisions cannot be based solely on a cost-
SSSr^S?'  i****?*?** g°Vemments *">» *at ** ci^ns demJd ground water
nrot^f    ^  !WSu    ^ PaSS 81Ve Pr°gram managers a ^wardship responsibility to
protect ground water beyond simple economic analyses. In addition, program managed must
teke into account societal equity in distributing the expenses and advantages of environment
protection. This includes protecting the resource for future generations.
,wv ^n°™' ^y*8 is a tool for decision-making.  As long as it is used with the other
decision-making tools, it can prove very useful for ground water protection decisions.

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                                                             1.   Introduction
 Any action that a community or state takes to protect its ground water resources will have
 consequences for the people living in the area, for business and industry, and for state and
 tocal governments.  These consequences can be environmental, economic, social, or political
 They can also be negative ("costs") or positive ("benefits"), and are often inter-related   Fo7
 example, a local government may enact a stringent regulation to improve the quality of
 k^TfnZ^ T T06 °f dlinldn? Water* ™* action may ^P086 "°««^ hardship on a
 local industry thus threatening its viability.  On the other hand, the same regulation may
 attract new industries that depend on a source of clean ground water.

       To make the best use of resources and to have the greatest impact on the
 environment, a program  manager needs to prioritize his or her actions based on these
 consequences.  When designing a new ground water protection program or action a proeram
 manager must consider all of the possible consequences and incorporate  mem into me

            "1   rOCeSS                                   assessment of a Program's
       Several tools exist to evaluate the consequences of ground water protection programs
including .economic, environmental, political, and sociological impact analyses. Economic '
analysis is a decision-making tool that planners can use to identify, measure and quantify the
economic impacts of existing and planned programs, to compare the impacts across
programs, and to estimate their importance. This guidebook shows you how to assess these
costs and then how  to use two methods that formally incorporate economic considerations
into ground water protection decisions:  cost-effectiveness analysis and cost-benefit analysis
       D
Cost assessment is the tool that is used as the basis for the more detailed cost-
effectiveness and cost-benefit analyses.  It allows you to identify the costs
associated with a program, select the most appropriate ones to include in the
assessment, and estimate the program's costs.

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 1.  Introduction
        D     Cost-effectiveness analysis is most often used to compare actions with the
              same objective and decide which of them will have the most effect for the
              funds expended. It is also used to evaluate a single option's ability to attain a
              quality standard or given amount of pollution prevention under a fixed budget.

        D     Cost-benefit analysis is simply a comparison of a program's costs and
              benefits, which can be expressed as a ratio or as net benefits (by subtracting
              costs from benefits).  This form of analysis is generally used to determine the
              value of a particular program.


Why Use Economic Analysis?

One of the indispensable tools ground water protection managers use to make difficult
program decisions is environmental analysis, which examines how actions affect the physical
      ™ ^   EC°"°miC 3nalysis pr°vides a different  ersective
                                         ,                        ons aec   e pysca
         ^ro EC°"°miC 3nalysis pr°vides a different Perspective by analyzing the monetary


       Developing estimates of the costs, benefits, and cost-effectiveness of ground water
protection programs (or obtaining a better understanding of the estimates of others) provides
ground water program managers with several advantages:

       D    Efficient Decision-Making

             Economic analysis allows you to make decisions that consider the full range of
             costs and benefits to  your community or state.  These include both the
             program's direct impacts (e.g., the amount by which pollution levels are
             reduced per dollar spent) and indirect impacts (e.g., the loss of tax revenue
             due to the relocation  of businesses or higher property value because of the
             desirability of living near a clean ground water source).

       D     Efficient Use of Resources

             Your program can make the most efficient use of limited financial resources
             by using economic analysis.  This tool can help you to choose among options
             for reaching a ground water protection goal on the basis of cost-effectiveness
             Without this analysis, the goal may still be achieved, but at greater expense
             than necessary.  By placing resources where they can have their greatest
             impact, valuable funds can be used for other programs.  This tool also helps
             minimize the economic  consequences for your community or state.

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                                                                      1.  Introduction

        D     Priority Setting

               Economic analysis helps you to set priorities for your community or state's
               ground water protection actions.  EPA's Ground Water Protection Strategy
               recognizes the importance of this, stating that prioritization actions should
               consider the use, value, and vulnerability of a resource, as well as its social
               and economic values.  Priority setting is also one of the six strategic activities
               of a Comprehensive State Ground Water Protection Program, which will
               coordinate federal, state, and local ground water protection efforts.

        Q     Program Justification

              When ground water protection programs are being proposed, they have the
              potential to affect a great many interests, including the community's residents
              businesses, developers, industries, other government agencies and
              environmental groups.  Economic analysis can help you justify your program
 What Expertise Do I Need to Conduct These Analyses?
     d° f P*?* be «* ^^niist to use this guidebook. The information provided here is
                ^ y°  Wlth *" ""*#* °f eCOn°mic
                                        and level Of "dy* ** wm    mos useM for
    d         H         Pr0teCti0n Pr°gram-  S°mb users of ^ guidebook wm feel ft is
too detailed; others may want more detail.  This guidebook can help users with more bask
                                                           i1^ *at may not be
                                                            detai1'
flnr>i  t1?*, guidebook descrfbes a few important and frequentiy used tools that you can
apply to help answer a basic question: What should I do to protect my area's ground water
supply? Although many of the terms introduced here may be unfamilL tfyou, you wm
recognize that many of the actions they represent are already part of your office's activities
St ££ Sf ? *?* aoooTny ChapterS 4 thr°Ugh 6 "* examPles of ^^c an^ysff'
tiia have already been conducted by ground water protection offices throughout the United
o tares.

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  2.  Introduction


        Because of the large number of technical and non-technical issues that are involved in
  economic analyses of ground water protection programs, you may also want to seek
  assistance from your state Superfund, RCRA, or other programs on such technical matters as
  selecting a remediation approach.  The bibliography at the end of this guidebook provides a
  list of the papers and books published on a wide variety of technical and non-technical
  matters related to ground water protection and economic analysis.


  Witt I Need to Hire Consultants?

 As an economic analysis becomes more precise, it also becomes more complex.  If you find
 that the level of analysis required is beyond the analytical capabilities of your office, it may
 be desirable to bring in expert assistance.  The decision to retain a consultant is subjective
 and depends largely on the method and level of analysis  selected, the degree of precision
 desired, the availability of information and data, and the specializations and numbers of
 professionals within your office.

        Regardless of the extent to which you use consultants-from estimating specific costs
 to conducting the entire analysis-it will be advantageous to become familiar with the
 concepts presented in this guidebook.  At a minimum, the method of analysis you select
 should suit your program's needs.  The more familiar you are with the economic analysis
 process, the more actively you can participate and contribute valuable information  A
 collaborative effort between your office and its consultants will ultimately produce the most
 accurate results and ensure  that they are used well.


 How Should I Use This Guidebook?

 This guidebook addresses a series of steps in economic analysis.  Each chapter represents a
 step in the process, beginning with preparing for an economic analysis and ending with
 conducting cost-effectiveness and cost-benefit analyses. (Although the cost-effectiveness and
 cost-benefit chapters are comprehensive in their outline of important analysis steps, they do
 not devote weighty attention to the steps covered in detail in previous chapters. They do,
 however, make it clear when and where you should refer for more information.)

       This guidebook is  designed to be read as a whole.  If you are fairly familiar with
 economic concepts and elect to read only a particular section or chapter, you should be able
 to do so with reasonable comprehension. However, you may have to refer to other chapters
when directed to do so, in order to fully understand a step or concept, and how it fits into

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                                                                  L Introduction

                        The general ""* of -*
 D     Chapter 2: Preparing for the Economic Analysis

        This chapter helps you set clear goals and objectives for your ground water
        protection program and then to develop a program or program options.  These
        in turn, will help you select the most appropriate method of analysis for your '
        program.  This chapter also presents some useful pointers for achieving a
        balanced and consistent analysis.

 D     Chapter 3: Establishing the Baseline

        Before initiating a new ground water protection program, it is necessary to
        carefully analyze the present and future ground water situation in your area
        under current levels of protection.  This step is useful for determining a
       program s costs, benefits, or effectiveness.

 d      Chapter 4: Assessing the Costs

       Cost assessment is a necessary element for both cost-effectiveness and cost-
       benefit analysis.  The decisions made on a ground water protection program
       will depend, to some extent, on its costs to the program office, industry and
       community. This chapter describes the different types of costs associated with
       ground water protection programs, the appropriate costs to include in the
       analysis, and the appropriate estimation techniques used to measure costs.

n     Chapter 5:  Analyzing Cost-Effectiveness

       This chapter addresses the uses and limitations of cost-effectiveness analysis
       and the various ways it can be expressed in the context of ground water   '
       protection programs.  A step-by-step guide to cost-effectiveness analysis is also

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 1.  Introduction
       D     Chapter 6: Analyzing Cost-Benefits

              This chapter discusses the appropriate use of cost-benefit analysis.  It also
              describes several types of benefits that result from protecting ground water
              resources.
Following Chapter 6, glossary is provided for the technical terms used in this guidebook.
The bibliography at the end of the guidebook will point you to some useful sources of more
detailed information on a given subject.

       Last, it is important to stress that this guidebook does not present any hard and fast
rules for conducting an economic analysis, nor does it dictate your choice of a specific type
of analysis.  Rather, once you have become familiar with the concepts presented here, you
will be able to choose the best type of analysis based on the circumstances of your program
and community, and the resources of your ground water protection office.

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                                                   2.    Preparing for  the
                                                      Economic Analysis
  Economic analysis allows you to quantify the impacts of a program or action in terms of
  dollars or some other measure (e.g., parts per billion of contamination).  Once the impacts
  are quantified  you can then compare them with the impacts of alternative programs or
  evaluate the effects of policy changes across programs.  Using economic analysis, you can
  examine a program with regard to how its value is being defined and by whom, who will  pav
  the costs of protection, who will benefit from protection efforts, and on whose behalf your
  ground water protection office is acting.

       In order to use economic analysis effectively, it is first necessary to set clear goals
 and objectives for your program, and then to develop a program or a number of program
 options  The goal, objectives, and program options should, at the very least, reflect a
 comprehensive understanding of the current and reasonably expected uses of ground  water
 the ground water protection problem your community or state is facing, and the potential '

 ST£? A wT?gT (tWS CMI be d°ne thr°Ugh Strategic Activity #2 of «« Comprehensive
 State Ground Water Protection Program).  Once these are well established, you can select  the
 most appropriate type(s) of economic analysis to conduct.

       A hypothetical example of the steps taken in preparing for the economic analysis  is
 given at  the end of this chapter.  To help illustrate the concepts presented in this guidebook
 this example is  earned through each of the remaining chapters.
Define the Ground Water Protection Program

The first step in defining your ground water protection program is to set
its goal, which is simply a statement of what the program hopes to
accomplish.  It generally declares for whom or for what purpose the
ground water is being protected (e.g., community health, industrial
processes), and may also identify the sources of contamination the
program intends to protect against (such as pesticides or leaking underground storage tanks).
Seta
Goal

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 2.  Preparing for the Economic Analysis


        A program goal may be specific, such as "ensuring county residents of an adequate
 and safe water supply through the year 2000," or far broader, such as "implementing ground
 water protection measures in an effort to avoid future contamination problems."  The
 specificity of a program goal will most likely reflect a community's perception about a
 potential threat to its ground water supply.
                                                                        Set
                                                                        Objectives
       The second step is to set the program's objectives, which are
 statements of what your ground water protection actions intend to
 accomplish.  These are often specific and are expressed as quantities,
 such as the units or levels of pollution prevention achieved per dollar
 spent, the dollar cost per unit of pollution prevention achieved, or a                    ~~~
 program that generates maximum benefits as a percentage of total cost. The objectives can
 also be more general, such as establishing a county-wide  program to ensure safe drinking
 water to private wells, or protection from a specific contaminant for a specific cost.

       Establishing quantified objectives serves two main purposes.  First, they strengthen
 and lend legitimacy to program decisions.  When program managers must justify their
 programs to state and local officials, public interest groups, or other private entities,
 objectives help explain what will be achieved when the program is implemented.  Second,
 objectives help managers to limit the number of program  options to be evaluated, thus saving
 time and effort. For example, establishing a minimum ground water quality standard may
 eliminate some protection program options from consideration based on their ineffectiveness.
                                                                       Define
                                                                       Options
       The third step is to. define the program's options, which are the
alternative actions (or components) that could be undertaken to meet the
program's goal and objectives. These include, for example, permit
requirements to restrict aquifer discharges, underground storage tank
safety measures, ground water monitoring, zoning, administration, and
enforcement. Options can include both different components and different levels of
implementation for similar components. The feasibility of each option will depend on who
the program will affect and how severely, and a number of legal, social, and political
considerations in addition to its economic impacts.
       The final step before undertaking an economic analysis of a
ground water protection program's options is to identify all of the
economic and non-economic impacts of each component. This does not
require extensive research or knowledge in each discipline, only a
thoughtful evaluation of the component.  Program managers should
                                                                       Identify
                                                                       Impacts
8

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                                              2.  Preparing for the Economic Analysis



  carefully think through the implications of each component, and the program options as a
      ti0n                                           what their inwm be    >e
  questions below will help you explore all of the impacts that might accnie to various paries:


        D    How does the proposed ground water protection program or component affect
              the seventy or extent of potential ground water contamination?


        D    Does the proposed program or component directly address the potential for
              adverse effects resulting from ground water contamination?


        D    Who or what does the proposed program or component directly affect
              including the  surface water ecosystem?  Who does it indirectly affect?' Askine
              these questions specifically may uncover costs and benefits that were not
              immediately obvious.


        D    What is  the timing of the impacts that will result from the program or

              component?  Because  timing differences can significantly affect the value of
                                            •  ~te *• ~°n °f


 Choose the Appropriate Method of Analysis


rStic7C^±-S,iS °nlf °ne am0n{? many decisi°n t0ols; others indude environmental,
pohtical, and sociological impact analysis.  However, because economic analysis allows he
impacts of a program to be more easily quantified than these other, inter-relaL t™rf

Smmunfty     ^ ^^ "^ °f "^ ^ V*™ °f ; Potion
.ff H F°r CXamPle' cevaluating the compliance costs of a program in relation to the
effectiveness or benefits of various options will foster the design of a program that will
achieve a desired environmental impact with the least amount of adverse SnomTc impact

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  2.  Preparing for the Economic Analysis


        Economic analysis is useful in helping managers to improve their program decisions.
  From the perspective of the ground water program itself, such analysis will help managers
  make the best use of their limited resources.  From a broader perspective, it will minimize
  the economic impact on the community affected, and presumably reduce the associated
  political and sociological impacts.  And finally, economic analysis will provide additional
  information to help managers justify their program.

        Within economic analysis are several techniques that have been widely employed or
  have gained acceptance as providing useful information to the decision process. Three of
  these techniques are examined in this guidebook:  cost assessment, cost-effectiveness
  analysis, and cost-benefit analysis.

        Cost assessment can be used alone or in conjunction with the other two techniques.
  The value of cost-benefit and cost-effectiveness analyses lies in their comparison of costs to
  other critical factors.  The appropriate method depends on an evaluation of the information
  available to the program manager and an  assessment of the needs and  resources of the
  community or state.


        Cost Assessment

        Cost assessment can be of value when it is used independently. This technique is
 most useful as a preliminary analysis in situations where program managers know what party
 or parties will be  expected to pay for the ground water protection program, and when the
 costs to those parties are expected to be excessive.  Under such circumstances,  it may be
 helpful to begin with a cost assessment in order to narrow the range of program options  or
 to dismiss a program based  on its excessive cost.  Once this has been accomplished   the'
 effects or benefits of the remaining  options can be assessed using cost-effectiveness or cost-
 benefit analysis.
       Cost-Effectiveness Analysis

       This type of analysis is appropriate when a program manager wants to compare
alternative program options that address the same objective in order to determine which of
them will have the greatest effect for the funds expended.  Cost-effectiveness analysis is also
useful in evaluating a single program option for its ability to attain a quality standard or
threshold of pollution prevention given a fixed budget.  The cost-effectiveness of protection
programs can be expressed in a number of ways, including:
10

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                                                2.  Preparing for the Economic Analysis
         D    units (or levels) of pollution prevention achieved per dollar spent
         Q    units (or levels) of pollution prevention achieved for programs of equal cost
         O    dollar cost per unit (or level) of pollution prevention achieved
               dollar cost of programs that prevent equal units (or levels) of pollution.
        D
         Cost-Benefit Analysis
                      1S appropriate when the decision maker wants to determine the value
                     m; U 1S t*piCally empl°yed when * is necessary to decide wheto to
                    WE r r0teCti°n                                      "
 ra            I                            °r °ne of its ~ents.  m the        of
 cost-benefit analysis, value is represented in one of two ways:

       D    the ratio of benefits to costs
       D    net benefits, which are calculated by subtracting costs from benefits.


Define the Scope of the Analysis

Before you conduct an economic analysis, it is necessary to define its scope fi e  identifv
        ws°d  e    uded in the
                                in the
                         °f "
 r^mn,    ^P.16' ^PP086 * community's ground water protection program results in

                       *^^^
                                               r^
Dran           -                                    become too  md if
program managers try to incorporate too many effects into their economic analysis
Converse y, a poorly defined scope might lead managers to exclude costs and benefits that
realistically should be included in the analysis.                             oenents mat


                ********* wiu ensure that all potentially affected or interested parties
                     '   at *' aMly8is "^ *" ""^           area, and thatS?
                                                                    ,
                  e'8l' °WtS) ** inCluded'  ^ SCOpe Of ^ P^1^ wil1 be influenced
by a number of issues that are of concern to program managers, either by choice or as a
consequence of public policy. These include:
                                                                                   11

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  2.  Preparing for the Economic Analysis


         D     the constituency for whom the analysis is being undertaken
         D     the budget constraints of the program office
         D     the extent to which the program may affect an industry or community
               disproportionately
         D     the economic stability of an industry or community potentially affected by a
               program
         D     the geographic boundaries within which a program will be implemented
         D     the severity of an environmental threat in the absence of a protection program.


 Hypothetical Example

 The following pages contain a hypothetical example that illustrates how a ground water
 protection program is defined and how to choose an appropriate level of economic analysis
 •niis example is then carried through Chapters 3 through 6 to assist you in conducting each
 of the three types of economic analysis described in this guidebook.

        The example concerns the fictional Fairhomes County (population 500,000), which is
 located in the northwest part of the state. The county relies almost entirely on ground water
 lor its water supply, although it contains numerous lakes and several small streams that
 support recreational use.  At present, there are 200 public water supply wells and about
 25,000 private wells in use in the county.  Seventy-five percent of the County's water is
 provided for residential use, 18 percent for commercial  and industrial use, and 7 percent for
 agricultural and other uses.

       The County has experienced considerable residential and industrial growth in the last
 decade.  Its ground water contamination, although currently limited to shallow private wells
 is a concern given the likelihood of future growth as well as the County's reliance on ground
 water resources.  In 1991, the County began developing a comprehensive ground water
 management plan. The exhibit on the next page summarizes how the County went about
 defining the plan and the way in which it analyzed alternatives for implementing it.

       At present, there is one area of approximately 50 homes that is affected by the acute
 ground water contamination of private wells.  The contamination originated from a leak in an
 above-ground tank at a petroleum tank farm.  The leaking tank has been drained, but the
 existing contamination of the ground water will likely remain for some time.
12

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                                              2.  Preparing for the Economic Analysis
Hypothetical Example:  Preparing for the Economic Analysis

 "

 Defining a Ground Water Protection Program
            ^^^^^^^^^^^^^^^"*""*"""*""""""""""''""""""•••'•••••^"•••^•••^••ii"^^^^™™™
  D  Goal:  To ensure a safe and adequate supply of ground water for all existing and
  future needs in the County.
  D  Objectives:  Establish a County-wide ground water protection program that ensures
  adequate and safe supplies in a manner that is cost-effective and/or results in the
  maximum net benefits for the County as a whole.

  D  Options:


 Protection
 Program #1:
 Protection
 Program #2
 Increased ground water monitoring efforts, especially near public water
 supply wells.

 Additional emphasis on inspections and enforcement.
 Remediation of water supplies that become contaminated.


 New zoning restrictions, primarily affecting public supply well and
 recharge areas, but also limiting industrial/commercial development in
 residential areas.

 Additional standards and requirements for current businesses
 Outreach and technology transfer programs aimed at businesses.
Industrial property transfer approvals.
 D  Impacts:
                     identified the impacts of to two alternative protection strategies to
address possible future contamination.  These impacts are as follows:

Protection Program #1


In the event that contamination does threaten the County's water supplies, the program
should eliminate or reduce substantially the actual contamination that occurs  Other
impacts are:
                                                                                  13

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  2. Preparing for the Economic Analysis
   Defining a Ground Water Protection Program
          *•         County residents, through higher taxes and direct assessments, pay for
                    administrative, monitoring, enforcement, and if appropriate,
                    remediation costs.

          +         Businesses may face increased fines and other compilaince costs.

          +         Property values would change.


   Protection Program #2


   The program should decrease or eliminate the threat of contamination, particularly with
   respect to the public supply wells, where the zoning and technical standards will have the
   greatest impact.  The impacts are:


          >         Businesses face higher compliance costs and some business relocation
                   may occur due to zoning restrictions.

          »•         County residents pay for the costs of administering zoning,
                   technological studies, and outreach programs.

  	*	Property values may change.

   Choosing the Appropriate Method of Analysis

   D  Cost Assessment:  This method will be used to determine the costs of all potential
  program components.	

   D  Cost-effectiveness Analysis:  The County will conduct a cost-effectiveness analysis of
  the two alternative programs.

  D  Cost-Benefit Analysis:  The County will also conduct a cost/benefit analysis of the
  two alternative protection programs.
14

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                                              3.    Establishing the

                                                                Baseline

       s a starting point for an economic analysis of a ground water protection
       » necessary so that the analyses of all options start from the same position

   nrJJ?     ^ ^ assessment of the ^ound water resource situation with no'
   protection programs or program elements.


 The baseline calculation includes the costs as well as the effects fe e  incremental






 Establishing the baseline involves defining or predicting:


 O     the present condition of the ground water resource


 D     the future condition in the absence of any additional program elements


 D     the action that will be taken in response to the future condition under the
       existing program


O     the condition of the ground water after the action has been completed.



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3.  Establishing the Baseline
       Four steps are involved in establishing the baseline.  These are:

       D     Step 1:  Define the baseline
       D     Step 2:  Quantify the baseline
       D     Step 3:  Consider factors that increase or decrease baseline estimations
       D     Step 4:  Incorporate probability into the baseline calculation.
Step 1: Define the Baseline
                                                                        No Action
                                                                        Scenario
 The baseline can be defined under two scenarios.  In the first, it is
 assumed that no action will be taken in response to future contamination.
 For example, suppose that a community is facing the likelihood that the
 quality of its ground water will diminish to the point that it will be
 unsafe for drinking in 20 years.  Under this scenario, the baseline must
 include the costs of having unsafe drinking water (e.g., increased costs for individuals to buy
 bottled water, lost property tax revenues, business relocation, increased health risks).  While
 this is considered to be a true "do nothing approach," it may inaccurately estimate the
 baseline because few communities are likely to ignore such future contamination.  In other
 words, a community is unlikely to  allow people to consume contaminated drinking water
 indefinitely.
                                                                        Action
                                                                        Scenario
       Because the true "no action" scenario is unlikely, a program
 manger will probably choose to use the second, or "action" scenario, for
 the baseline calculation. In this scenario, the baseline is defined
 assuming that some action would be taken under the existing program in
 response to contamination.  The baseline under this scenario would
 include the total costs of responding to the contamination, plus any costs associated with the
 contamination occurring before the response action is taken.  If, for example, several public
 water supply wells are forced to close due to contamination from abandoned drums of
 hazardous waste, the baseline should incorporate the costs associated with losing the wells in
 addition to the costs of removing the buried drums.

       If you assume that the response to contamination is not entirely successful (that is,
 some additional contamination occurs in spite of the remedial action taken), you should also
 include these costs in the baseline.  In the previous example, if after removing the drums and
 any contaminated soils, another public supply well becomes contaminated, the costs
 associated with the newly contaminated well must be included in the baseline.


16

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                                                           3.  Establishing the Baseline
                                                                        The Time
                                                                        Frame
       Baseline estimates must be calculated over a defined period of
time that coincides with the life of the proposed ground water protection
program.  The Office of Management and Budget recommends that
federal programs be evaluated on a 30-year basis.  State and local
ground water program managers may choose another period of time to
accommodate their circumstances and the information available to them.


Step 2:  Quantify  the Baseline

Quantifying the baseline refers to estimating its impacts.  The baseline can be quantified in
two respects:  its costs and its effectiveness.
       Baseline Costs

                               tOtal COStS of resPonding *> contamination and the costs of
 .,    ,    ,.   -    -'      	^ spite of the response.  The most common elements of
 these baseline costs are:

       D     treatment costs (i.e., the cost of remediating ground water contamination)
       u     replacement costs (i.e., the cost of providing safe drinking water)
       U     damage costs (i.e., the cost of contamination effects).

 It is important when calculating the baseline that these costs not be double counted  For
 example, if you include the estimated cost of remediation in the baseline, you should include
 fte only cost of contamination for the period before the remediation is completed.  Similarly
 the baseline cost cannot include the cost of contamination and the cost of providing safe
 water, unless there will be a time lag between the detection of the contamination and the
provision of safe drinking water. These are discussed in more detail below
       The costs associated with remediating contaminated ground
water can be large, and depend on the type of remedy selected.  They
include the cost of obtaining and maintaining the remediation
equipment and staff necessary to conduct the remediation.
                                                                    Treatment
                                                                    Costs
                                                                                  17

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  3.  Establishing the Baseline


         There are two general types of remedial activities. The first is active restoration,
  which includes such measures as extraction and treatment, and in-situ treatment. It is
  favored in cases  where the contaminants present are mobile, there are moderate to high
  hydraulic conductivities in the contaminated aquifer, and effective treatment technologies are
  available.  This type of activity includes physical, chemical, and biological treatment
  methods.

        The second type is containment through hydraulic control, which relies on measures
  to physically prevent or control the spread of contaminants by installing pumping wells
  subsurface drains, slurry walls, and the like.  Containment is favored when the ground water
  is naturally unsuitable for consumption, when there is low projected future demand for the
  water, contaminants are of low mobility or concentrations, there is a low potential for
  exposure, or the aquifer has low transmissivity.  These actions are generally less expensive
  than active restoration.

        Because the selection of a remediation approach is a complex process, you may wish
 to involve staff from the Superfund or RCRA programs to help develop remediation
 scenarios.  There are also numerous documents that contain information on remediation
 technologies and their costs (see the bibliography for examples).
        As an alternative to responding to contamination via treatment,
 your program may call for simply replacing contaminated ground
 water supplies.  In such a case, the costs of replacement must be
 included in the baseline.  You must also decide whether the likely
 method for replacement will include hooking up to an existing                         ~~~
 alternative supply, drilling new wells, or providing water from another source (e.g., bottled
 WU.LCI 1.
                                                                       Replacement"
                                                                       Costs
water).
       It is possible that your baseline will include both replacement and treatment costs
For example, if you supply bottled water to individuals affected by contamination before
treatment systems are installed, these costs must be included in the baseline. You may want
to rely on staff from your state or community health and environmental protection agencies
to help you develop plausible assumptions about the costs of providing safe drinking water
until remediation, if undertaken, would allow a return to the original source.
18

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                                                            3.  Establishing the Baseline
         Damage costs are incurred by affected parties as a result of
  ground water contamination and might include the following:
Damage Costs
         D     Adverse Health Effects.  Quantifying these effects is a complex task.  Although
               it may not be possible to quantify them precisely, it is necessary to identify
               these effects and factor them into the baseline.  This can be done using a risk
               assessment, which is discussed in detail in Chapter 6.

         D     Aesthetic, Environmental, and Property Damages.  Although techniques for
               estimating these costs have not been fully developed, both the contingent
               valuation and hedonic property value methods are useful; these are presented
               in Chapter 6.

        D     Economic Dislocation.  If the contamination of ground water would cause an
               industry to relocate,  then the lost jobs and tax revenue that result are
               considered to be costs.  For example, if the contamination of a wellfield means
               that three companies will relocate, the number of jobs these companies provide
               must be multiplied by their salaries and then by  the tax rate to yield the
               income tax revenues lost.

        D    Litigation Expense. Any of the above effects may lead to litigation against a
               state or community.  To estimate litigation expenses, it is necessary to make
              assumptions about the likelihood of liability suits and multiply this probability
              by an average figure for damages awarded in similar suits.              .
 onlv thl° ?°Ulate ^ b?eUne Under ** aCti°n SCenari0' vou must make c61^ to include
 only those damage costs that are incurred in spite of the response taken to address
 contamination; otherwise, you will over-estimate the baseline.  For example, suppose that a
 community estimates the total cost of ground water contamination in terms of health effects
 lost jobs, lower property values, etc., to be $20 millon under the no action scenario  The '
 ground water protection manager, believes, however, that under the action scenario,' existing
 monitoring and remediation programs will respond to the contamination long before it
 reaches such dramatic proportions.  The program manager estimates that these remedial
actions will decrease the extent of contamination, resulting in fewer adverse health effects
and less economic displacement, thereby reducing the cost of these changes to $5 million
Adding these damage costs of responding to contamination yields the baseline costs under the
action  scenario.
                                                                                    19

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  3.  Establishing the Baseline


        Baseline Effectiveness

        In the context of ground water protection, effectiveness refers to the impact that a
  program (or no program) has on the quality of the resource.  Effectiveness can be quantified
  in several ways, including the occurrence of pollution in absolute terms, units (or level) of
  pollution (e.g., ppb), or units (or level) of pollution prevented.

        In quantifying the baseline effectiveness, the program  manager predicts the occurrence
  or level of pollution  that is likely to result in the absence of any additional program.  This
  prediction will be based largely on professional judgment and experience in monitoring
  ground water resources.  By quantifying the effectiveness of the baseline, the ground water
  protection manager can ensure that when conducting a cost-effectiveness analysis of a
  program, only the incremental effects of the program are considered.

        For example,  if a program manager estimates that existing treatment systems would
 result in concentrations of 50 ppb of a particular hazardous constituent in groundwater, this
 concentration serves as a baseline from which to measure the effectiveness of an alternate
 treatment strategy or protection program.


 Step 3:  Consider Factors that Increase  or Decrease Baseline Estimations


        Factors Affecting Baseline Costs

        The ability to  estimate the costs of remediating contaminated ground water, providing
 safe drinking water, and contamination effects depends on a knowledge of local factors, as
 well as assumptions about the extent and  severity of local contamination, and the parties
 affected.

        D     Extent  of Contamination.  As a rule of thumb, the more widespread the
              contamination might be,  the more  expensive the remedial actions will be.  In
              estimating the likely extent of either the "no action" or the "action"
              contamination baseline, you may use a single worst-case scenario or several
              scenarios ranging from mild to severe.  The choice of scenarios will depend on
              the program options being considered.  For example, in a small community
              served  by three or four public water supply wells and numerous private wells,
             a worst-case scenario might involve the loss of all wells.  On a state level,
             however, it is unlikely that all water wells would be lost.   A worst-case


20

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                                                           3.  Establishing the Baseline


               scenario in this case might assume that the state would be forced to establish
               new sources of drinking water within its borders.

        D     Severity of Contamination. This will affect the level, and thus the costs, of the
               response required.  For example, so  long as contaminants in drinking water do
               not reach concentrations above the maximum contaminant levels (MCLs), the
               water might still be used for drinking and the remedial actions required might
               include only intensified monitoring and limiting certain activities in the
               wellhead area.  However,  when contamination  exceeds MCLs, more costly
               remedial actions might be  required.  Thus, the  assumptions made about the
               short-and long-term severity of contamination scenarios will have an  impact on
               the baseline cost estimates.

        D    Affected Panics.  The individuals who incur costs because of ground water
              contamination are called the "affected parties."  Determining which parties
              should be included in a contamination cost estimate can be a thorny issue and
              will have a direct impact on the estimate.  For  example, if the contamination
              of a wellfield might prompt a local manufacturing firm to leave the
              community, the cost of contamination would be under-estimated if this
              possibility is ignored. At the state level, however, it is safe to ignore if the
              industry simply moves from one city  to another within the state.

              The identification of affected parties raises both equity and fairness issues.
              Such issues may make it more or less reasonable for a particular group of
              people to bear the costs of a program or program component, or the costs if a
              program is not implemented.  However, the debate of such issues is largely a
              political matter; economic analysis can only provide additional information to
              assist in evaluating the impacts of political decisions.


       Factors that  Influence Baseline Effectiveness

       Accurately quantifying baseline effectiveness  will depend largely on  the program
manager's knowledge and experience with similar ground water resource conditions.


       D    Physical Characteristics. The hydrology, geology,  topography, and climate of
             the ground water resource and its surrounding area  should be considered.
                                                                                    21

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  3.  Establishing the Baseline


         D    Extent of Existing Program.  The age, expected life, and quality of an existing
               ground water program's physical capital assets must be considered when
               estimating baseline effectiveness and benefits.  You may assume the shortest
               life expectancy of the physical assets or a probable range given  that some
               upgrades will be made at marginal cost.  It is also necessary to  factor in the
               probability of having enough future budget appropriations to satisfy the
               financial needs of an existing program.

         D    Future Trends.  To the extent that changes in population and industry growth
               can be forecast, they should be considered in quantifying future  contamination.
               However, it should riot necessarily be assumed that growth in an area will
               result in increased ground water contamination.  For example, if your area
               will experience commercial, rather than industrial growth, ground water
               contamination may be expected to decline,  depending on the rate of change
               and volume of new development.


 Step 4:  Incorporate Probability into the Baseline  Calculation

 Once you have estimates of baseline costs and/or effectiveness, it is still possible that the
 baseline is biased. This is because it is not possible to be certain that ground water
 contamination will occur,  or reach a predicted level, in  the absence of an additional
 protection program.  Intuitively, this fact will lead to overstating baseline costs  and
 understating baseline effectiveness.  These exaggerated impacts can  be accounted for by
 incorporating probabilities into the calculation.

 ...   .   Pr°£ram managers should realize that even with  detailed data, estimating the
 likelihood of future events is not a precise science.  In addition, it may not be possible or
 practical to obtain data that can assist in making probability calculations.  To overcome these
 problems, you may elect to make a simple uniform assumption  of 100 percent probability of
 contamination.  Such an assumption can be interpreted as a worst-case  scenario.


       Incorporating Probability in Baseline Cost

       To incorporate probability into the baseline cost calculation, you must multiply the
 cost of contamination by the probability of contamination (or a level of contamination)
 occurring.  The result of this calculation is called the "expected cost."  The higher the
22

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                                                            3.  Establishing the Baseline


  probability of contamination occurring or reaching a predicted level, the higher the expected


        For example, if the cost of contamination is $1 million, but it has a 50 percent
  probability of occurring, the expected cost would be $500,000.  But if the probability is 90
  percent  then the expected cost is $900,000. Note that while the expected cost changes as
  the likelihood of contamination changes, the fall cost of contamination remains at $1 million
  thl™606?3? l° aSSlgn a probability of contamination that is greater than zero; otherwise, '
  the full cost of contamination would be $0.)


        Incorporating Probability in Baseline Effectiveness

        The probability that contamination (or a level of contamination) will occur in the
        s of an additional program will vary based on the assumptions you make about the
        that increase or decrease effectiveness.  As is the case with baseline costs
        — the estimated measure of baseline effectiveness (e.g., the level or concentration
            mant ™- a	f contaminants) by the probability of contamination
                            !C
        Calculating Probabilities of Contamination
       ^ternatively' y.ou ™y elect to as'ume different probabilities that contamination will
                              °n the baseiine
 in™  A Se"Sitivity "J81^ should b£gin by making assumptions about the factors that
 increase or decrease the baseline costs or effectiveness. Then, the probability of
 e^r^h °nH°r C°ntamination level should be determined based on these assumptions.  For
 SSrf 2^-°? aSSUmpUons ab°u; M a
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  3.  Establishing the Baseline
 probability estimates on historical or empirical evidence (e.g., studies of past contamination
 incidents) to the maximum extent possible.  For example, detailed hydrogeological surveys of
 the extent and rate of migration of a contamination plume may allow you to predict with
 greater certainty, the likelihood that certain wells will be affected.
24

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                                                         3.  Establishing the Baseline
Hypothetical Example:  Establishing the Baseline*
                                 For Baseline Costs
 Step!: Define the Baseline
  D  Scenano: The action scenario was chosen for the baseline.  The actions to be taken
 in response to contamination include replacing water supplies in areas with private wells
 affected by contamination and installing treatment systems at several public water supply

 D  Time Frame: 30 years.
 ^••_••MV.
 Step 2:  Quantify the Baseline
                          WatCr SUpply WeUs in ** County mdicate that approximately
 Ta      *    "I °ne C0mmuriity ««" be ^^ened by rising contamination levels
 To address this contamination, the County would choose to replace the ground water
                                           by constructing extensions from
 One-Time Costs:
       Transmission main extensions:
       20 miles of extensions x $275,000/mile

       Piping, pumps, and hookups to 200 houses:
       Average distance of 3,750 ft x $50/ft x 200 houses

       Bottled water until construction is completed (1 year):
       200 homes x 4 people/ home = 800 people
       Each person consumes 2 liters of water/day = 1,600 liters/day
       or 584,000 liters in a year x $.60/liter

       Estimated 5% decline in property values of
       200 homes valued at $100,000 each

       Total
  $5,500,000


$37,500,000
   $350,000


 $1,000,000

$44,350,000
                                                                                25

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 3.  Establishing the Baseline
                                For Baseline Costs (cont.)
   Step 2:  Quantify the Baseline (cont.)
   Well sampling data also indicate that several public supply wells may be threatened by
   contamination from industrial sources.  Because of the importance of (these wells to the
   County's overall water use, the County would install treatment systems to keep these
   wells in operation rather than shutting them down. The costs of these treatment systems
   are as follows:
   One-Time Costs:
         Installation of treatment systems:
         $1,700,000 per system x 20 wells
        $34,000,000
  In addition to these one-time capital costs, the program manager estimates that the County
  will incur some additional annual costs.  These costs include:
  Annual Costs:
         Property tax revenue loss:
         4.5% per year x total decline in property values of $1,000,000
       $45,000/year
         Additional County staff resources (e.g., hydrogeologists,
         enforcement personnel, engineers) and equipment costs

         Total one-time costs:

         Total annual costs:
    $2,300,000/year

       $78,350,000

$4,345,000 per year
26

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                                                          3.  Establishing the Baseline
                               For Baseline Costs (cent.)
 Step 3:  Consider Factors that Increase or Decrease Baseline Estimations
 The program manager evaluated the potential extent and severity of contamination as
 well as the affected parties, to consider how these factors might change the baseline.

 D  Extent of Contamination:  If the extent of contamination increases (i.e  more wells
 are contaminated) with respect to either public or private wells, the baseline'will increase
 Conversely, if the extent is less, both elements of the baseline costs will decrease.

 D  Severity of Contamination:  Assuming that the contamination of the private wells
 does occur, the severity of this contamination will have little effect on these costs because
 the water supplies will be replaced regardless of the level of contamination   However
 changes in the severity could increase or decrease treatment costs at public supply wells if
 cheaper/more expensive treatment technologies are required or if less/more operations
 and maintenance costs are incurred.

 D  Affected Patties:  Currently, the program manager has not accounted for business
 relocation and  lost jobs due to contamination, primarily because there are few potentially
 affected businesses in the proximity of the private wells, and because firms using the
 public supply system will still have access to clean ground water from other weUs  If the
 businesses become major affected parties (e.g., if the costs of obtaining water from the
 public supply system go high enough to force some companies to relocate or go out of
 business), baseline costs could rise.

 The program manager believed that the severity and  affected parties could have only a
 marginal  effect on costs in either direction.  And because in deriving the initial baseline
 cost estimates,  the program manager relied on consultation with expert staff  engineering
 cost estimates, professional experience, and  available ground water data, the program
 manager was reasonably confident about the accuracy of the estimates
Step 4; Incorporate Probability into the Analysis

To simplify the analysis, the program manager decided to take a conservative approach
and assume a 100% probability of contamination (i.e., a worst-case scenario)
                                                                                   27

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  3.  Establishing the Baseline
                                 For Baseline Effectiveness                              1
   Step I/ Define the Baseline
    D  Scenario:  As before, the action scenario was chosen for the baseline.
    D  Time Frame:  30 years
   Step 2: Quantify the Baseline
   The County's ground water protection manager decided to evaluate the cost-effectiveness
   of the two programs on a per capita basis (i.e., how many people are protected and at
   what cost).  To ensure that only the incremental effects of the programs are measured,
   the program manager established a baseline number of people affected by contamination.
   As  was the case in the baseline cost calculation, the program manager assumes that 800
   people could be affected by the contamination of private wells.

   If each private weU is assumed to service one household of 4 people, the County's private
   wells serve 100,000 people, leaving its remaining 400,000 residents being served by
   public wells.  Assuming, as before, that 20 public wells (10 percent) are likely candidates
   for  contamination and that on average, each public  well supplies about the same number
   of people, then 10 percent of the population served by public supply wells, or 400 000
   people are likely to be affected by the contamination of 10 percent of the public wells
   Step 3:  Consider Factors that Increase or Decrease Baseline Effectiveness
   The program manger believes that the zoning program places more emphasis on private
   wells (i.e., through restrictions on development near residential areas) than does the
   monitoring/remediation program.  Therefore, changes to the baseline effectiveness
   relating to private wells could have a slightly larger impact on the relative cost-
   effectiveness of the zoning program.  However, because the number of private well users
   (800) potentially affected by contamination under the baseline is so small relative to the
   number of public supply well users (400,000), the program manager elects to disregard
   the likely minor impact that such changes to baseline effectiveness might have.
  Step 4: Incorporate Probability into the Analysis
  As before, the probability of contamination is assumed to be 100%.

*  In this hypothetical example, some of the costs are presented as one-time costs, while others are
expressed on an annual basis.  In conducting an economic analysis, it is necessary to express all costs
as either one-time or annual costs.  Chapters 4 and 6 discuss "amortization" and "present value"
concepts that can be used to convert costs into either annual or one-time costs.
28

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                                                4.   Assessing  the  Costs
  An important factor that affects a decision to protect ground water is the costs that a
  protection program imposes on the community, local industry, and the ground water program
  office.  Assessing these costs is a fundamental step in determining the progr^ poteS
  effectiveness and in comparing its costs and benefits.                program s potential








 and to estimate the costs using a variety of methods
 Step 1:  Select the Costs
                          protection P"*™ cover the program's entire spectrum from

                          rnf to *$"** involved * compiying with
      costs tail into two broad groups: direct and indirect costs.

 The first step in the cost assessment is to classify each of the costs for a program into one of
 tiiese two groups, which makes it easier to identify all of the relevant costs Tmore deSled

                  "* **"" C°StS' " Wdl " S°me US6ful Categories of
       Classifying the  Costs
are cn^^*™ ^^ *"""* ^ indirect COStS is determined by how closely they
are correlated to the protection program.                                           y
                                                                                29

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  4. Assessing the Costs
        Direct costs are paid by governments, firms and individuals
  who are directly affected by a program or policy. These costs, which
  are often fairly easy to define and quantify, are incurred by those who
  design, implement, and enforce a program,  as well as by those who
  must comply with the program's  requirements. Examples of these
  types of costs are:
                                                                        Olrect
                                                                        Costs
         D
        D
               salaries for state or local officials who are involved in preparing regulations,
               ordinances, technical guidance, and information materials related to a
               protection program

               the cost a manufacturer incurs to install new spill control measures or leak
               detection systems in order to comply with the program.
                                                                        Indirect
                                                                        Costs
        Indirect costs represent the costs that are "passed on" to others
 by those initially responsible for the program or those who incur the
 program's direct costs.  Because they are passed on, indirect costs are
 more likely to be overlooked, and are more difficult to estimate.
 Nonetheless, it is necessary to include these costs in an economic
 analysis because they can impose a large burden on the parties who will bear them.

        Indirect costs can be classified in terms of how closely they are correlated to direct
 costs.  For example, if manufacturers are required to purchase pollution control equipment to
 comply with a program  (a direct cost), they may pass those costs on to consumers by
 charging higher prices for the goods they sell (an indirect cost). Such indirect costs are
 closely correlated to the direct costs.  Other indirect costs may be more loosely correlated
 such as a decreased demand for manufactured goods,  which in turn might lead to layoffs zmd
 decreased tax revenues if people relocate.

       To help you in identifying the costs associated with a ground water protection
program, it is useful to break down both direct and indirect costs  into subcategories based on
the form in which they are incurred (program or compliance costs) and on who incurs them
(public or private costs). By thinking about program costs in terms of these sub-categories
you can avoid overlooking any critical costs.                                           '

       Program costs include the costs of designing, implementing, and administering a
ground water protection program.  Examples  of these costs, which are usually direct costs
include:                                                                            '
30

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                                                                 4.  Assessing the Costs
        D    cost of equipment

        D    administrative and technical
              salaries

        D    legal fees for research

        D    public participation costs

        D    other costs specific to a
              program's design and
              implementation (e.g.,
              consultant design fees,
              travel).

 To ensure that all program costs are
 identified, it will be necessary to consult
 with all of the parties who would potentially
 be involved with the ground water
 protection program's design,
 implementation,  and administration.
       Compliance costs are incurred by
— r-jlic and private entities whose activities a
program.  Some examples of direct compliance
                                                          Double Counting

                                               A common error in identifying and
                                               estimating both direct and indirect costs
                                               is double counting. For direct costs,
                                               double counting may occur when the
                                               distinctions among administrative,
                                               design, and operation costs are somewhat
                                               imprecise and are later counted again as
                                               some other type of program or
                                               implementation cost.  Double counting is
                                               also a problem when assessing indirect
                                               costs. For example, if a manufacturer's
                                              full cost of purchasing pollution control
                                              equipment is included in the cost
                                              assessment as a direct cost, then such
                                              indirect costs as higher product prices
                                              cannot be included.  To avoid
                                              overestimating costs by double counting,
                                              it is important to evaluate costs carefully.
                                              regulated by a ground water protection
                                            costs include:
       D


       D

       D
             additional capital expenditures associated with meeting the requirements of the
             ground water protection program

             equipment or process costs to meet new operating requirements

             permit fees.
The State of Washington case study at the end of this chapter gives an example of how a
community estimated the direct compliance costs for a ground water protection program

       Otter costs may result from the program's indirect economic effects and are thus
considered indirect compliance costs.  These costs might include:
                                                                                   31

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  4.  Assessing the Costs


         D     decreased property values because manufacturing practices are restricted by
               new zoning ordinances

         D     higher prices for the goods and services provided by a regulated industry

         D     increased utility rates and lower tax rates caused by a loss of economic activity
               that results from ground water protection regulations.

      •  Public costs are those borne by the state or local government. For example, the
 salary for a new hydrologist in the Department of Water is a public cost.

        Private costs are those absorbed by a private entity such as a local business or
 manufacturing plant.  For example, the capital improvements a private utility must make to
 comply with a ground water protection program are considered private costs.

        The distinction between public and private costs may become obscured when they are
 passed on.  The direct cost of zoning restrictions, for example, may first fall on the private
 sector.  Later, when property values fall in the rezoned area, the public  sector will also bear
 a cost in the form of decreased  tax revenues.  Recognizing the distinction between these two
 types of costs  will allow you to be thorough in your cost estimations by  looking past the
 initial incidence of costs and determining if additional costs are passed on to other entities.

       In addition to these costs, any ground water protection program may have primary
 and secondary effects.  Primary effects are felt by individuals, firms, or agencies as a result
 of changes (e.g., new fees,  clean ground water) brought about by a program. Secondary or
 "spillover" effects, in contrast, are the result of actions taken by agents whose activities are
 not affected by a program, but are affected by changes made by individuals, firms, or
 agencies that incur primary  effects.

       To illustrate these types of cost, suppose that a local government  hires a new
 inspector for its program ~ this is a direct program cost. Firms incur costs to comply with
 the inspector's findings - these are direct compliance costs.  The firm then passes a portion
 of these costs on to consumers in the form of higher prices ~ these are indirect compliance
 costs. All of these costs are primary costs.  Now suppose that consumers facing the higher
 prices that have been passed on to mem have less money to spend on videos, and a video
 store goes out of business as a result.  This is a secondary effect, as are the costs associated
 with it.  Because of the immense potential complexity of estimating secondary effects, this
 guidebook discusses only primary effects (i.e., costs and benefits) and the techniques for
 estimating them.
32

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                                                                 4. Assessing the Costs

         Choosing a Level of Analysis

         Once you have identified and classified the costs of your ground water protection
                                         you wm *** 'm *• -*- * is
        Conventional economic analyses require that an evaluator assess all of the possible
             aPPr°Pri^ the benefits associated with a program.  However, ground water
               ™" »managerS °^n d° n0t have ^ resources necessarv to conduct such an
               is.  Recognizing this, three levels of analysis are presented in this section
        D     direct program costs
        D     direct compliance costs
        D     indirect costs.
                    framework to suit various perspectives that can be adopted  beeinnine
                   I111TV&C tfl*a 1»oc?f *)*vi«-fci**.* -fc-C JAM    *    *•    . -       J^»   $J**»**AA»^
       .            juires ine least amount of detail and ending with the most'
 analysis.                                                e             l
                                                                      Direct-  -;,'
                                                                      Program Costs
       Analyzing a ground water protection program solely from the
 perspective of a program office involves measuring direct costs
 excluding compliance costs.  These costs are incurred by the program
 office for the design, implementation, operation, and enforcement of
 the program.  This narrow perspective is only suitable for a cost-
 effectiveness analysis that will be used within a ground water protection office to
 program alternatives. Because it is pointless to measure benefits in a co£S
 narrow scope, all cost-benefit analyses will require the estimation of more types of costs.

      The most common technique for estimating direct program costs is comparative
 accounting (this method is discussed in the next section).  TMs involves brSg^ogram
down into its constituent activities and then assigning a cost to each activity basil upT
experience with similar types of programs or activities. The South Dakota case study at the
end of this chapter provides an example of direct program costs.
the r^T11 manaf ers Who ™l to fc™ me dire<* economic impact of their program on
the regulated community may elect to include direct compliance costs in their analysis
However, to support a cost-benefit analysis, direct compliance costs must be combined with
                                                                                   33

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  4. Assessing the Costs
  direct program costs.  Simply measuring the direct compliance costs
  will not provide a sufficiently broad perspective to balance an
  estimation of benefits.

        The technique used to estimate direct compliance costs depends
  on the nature of the program, that is, the entities and activities it
  regulates or restricts.  The two techniques typically used to estimate these costs-modeling or
  systems  engineering techniques and surveys-are discussed below.
Direct
Compliance
Costs
        Indirect cost estimation is used when large portions of the
 economic impacts of a program  will be passed on to others.
 Maintaining a consistent and balanced approach is essential in
 assessing these costs.
Indirect
Costs
        For example, in cost-effectiveness analysis, suppose that you are comparing two
 programs to determine which of them will achieve a threshold level of pollution prevention at
 the least possible cost.  You may find that an indirect compliance cost of one program
 (decreased land values to community residents due to a new zoning ordinance) is likely to be
 so significant that it must be incorporated into the cost assessment.  To be consistent, if its
 competing program has any impact on community residents (increased property taxes to fund
 an extensive monitoring program), it must also be included in the cost assessment of the
 competing program.

        In cost-benefit analysis, it is important to balance the inclusion of corresponding costs
 and benefits.  In the previous example, a program manager should only include indirect costs
 to community residents in a cost-benefit analysis if the benefits to residents are also included.

        It is important not to count what are called pure resource transfers as costs
 especially of such indirect compliance costs as lost jobs, decreased property values' and
 declining tax revenues.  For example, if a ground water protection program causes'an
 industry to move out of a certain area because of a decline in property values but another
 industry moves in and replaces the lost jobs, a pure resource transfer has occurred.
 Resource transfers are not always pure, however.  If, for example, decreases  in property
 values are not completely offset by corresponding increases elsewhere in the community, a
 portion of the decreased values should be considered costs.  Likewise, if an influx of job's
 more than offsets jobs lost as a result of the imposition of zoning restrictions, this would be
 counted as an indirect net benefit to the community.
34

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                                                                4.  Assessing the Costs


  Step 2:  Select the Cost Estimation Technique

  The specific techniques for estimating ground water protection program costs are fairly
            r         S6Cti0n ^^ f°Ur ^^ ** « USef* » estimati<*     o*
  components of various programs in cost-effectiveness or cost-benefit analysis.  They are:
               comparative accounting
               modelling or systems engineering techniques
               surveys
               combined approach.
        Comparative Accounting
                — aCCOUntinS involves breaking a program down into its constituent
 ovt       -lgmn? " T t0 
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  4.  Assessing the Costs


         Modeling or Systems Engineering Techniques

         Modeling or systems engineering techniques use models or designed systems of
  standard or reasonably expected processes (e.g., zoning changes) or projects (e.g., buildings
  parks) to which cost data can be applied.  The applicability of these techniques is limited
  primarily to programs that require capital expenditures on physical structures, plant and
  equipment, machinery, etc.  In a ground water protection program, these techniques might be
  used to estimate the cost of ground water monitoring, well drilling, installation  and
  maintenance.                                                             '

         The first step in preparing a cost estimate using these techniques is to list all of the
  structures, plant, and equipment that are anticipated to be needed under a program  In the
  second step, cost data are applied to each of these items. Reference materials such as Means
  Average Construction Cost Data and other documents listed in the bibliography to this
  guidebook can be useful in estimating the costs of these and other engineered structures  In
  the third step, the data for each item are totalled.

        Application.  Modeling and systems engineering techniques are most appropriate for
  engineered systems (e.g.,  structures, buildings, construction projects).   Obviously the
  touted applicability of these techniques is their principal shortcoming.   Their advantage is
  tfiat they are based  on well established data, and as a result, are fairly  accurate within their
 limited application range.


        Surveys

        Surveys allow a program manager to access information about the costs of a ground
 water protection program that are otherwise difficult to obtain.  Surveys can be used to
 obtain data on the cost of compliance from private firms and households.  The Dover  New
 Hampshire case study at the end of Chapter 6 shows how a survey can be designed  Dover's
 survey was used to determine residents' willingness to pay for clean ground water (this type
 of benefit will  be discussed in Chapter 6).  To be effective, surveys must be carefully
 designed and executed.  Technical references such as those listed in the bibliography can
 assist.you in using surveys to estimate the costs of ground water protection programs.

       Application.  Surveys are most useful in obtaining data that are not readily accessible
 to ground water program managers from parties that either have or can access such
 information. Because of the generally complex design requirements, however, conducting a
 statistically valid survey can be expensive.  In addition, in responding to surveys   people
36

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                                                                  4.  Assessing the Costs
                        to over- or under-state costs.  These incentives can introduce a bias
                       will in turn influence the accuracy of the survey's cost estimates.
        A Combined Approach
         The modeling or systems engineering techniques and the survey have a number of
  weaknesses that may discourage program managers from using memLe^ndenZ  To










 Step 3: Estimate the Costs
       D     me period or time over which the program or
       L-l     the time value of money
       D     incremental costs.
             Period


                                              need for defining a period of time over
L*CI1CJ.11S* 3J1Q CllCClS C3TlhOf hP ^Cf"lTTlQf'*a/^ f\\ra** m** *«*•£*_*.£.    •  i  /».
                   **»*»»»»x/t, L/W wou.iii
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   4.  Assessing the Costs
         Time Value of Money

         To evaluate costs that are incurred
  over time, it is necessary to make
  adjustments to reflect the "time value of
  money." Because of inflation and  other
  factors, the dollar value of a cost realized
  today is higher than if it is to be realized at
  some'point in the future. In order compare
  future costs with the costs incurred today,
  they are translated into what is called
  "present value" terms using an adjustment
  figure called the "discount rate."  The
  discount rate is based on a number of
  assumptions, including the inflation rate, the
  degree of risk that is perceived for a
  project, and the opportunity  cost (what the
  money intended for a program could earn if
  it were invested or used  for something else.

        To see why present value is
 important, consider the following example.
 Suppose you have a choice between
 receiving $50 today or $100  two years from
 now; which is the better  choice?  To
 compare the alternatives, it is necessary to
 express them in  comparable terms.

        One way is to see how much money
 you would have in two years  if you invested
 the $50 today.  Assuming a 10 percent rate
 of interest, a $50 investment  would  yield
 the following:
             Opportunity Cost

 The use of program resources carries a
 hidden, or "opportunity cost."  This cost
 is the equivalent of the highest-value
 activity foregone as a consequence of the
 activity undertaken.  Suppose a town
 passes a regulation that limits the number
 of new homes per acre in order to reduce
 the number of septic tanks within its
 borders. As a result, a developer who
 planned to put five houses on a 2-acre lot
 can now build only four.  The opportunity
 cost to the developer is thus the revenue
 he forgoes by building one less house; to
 the city, it is the tax revenues it loses
 from that house.

 The concept of opportunity cost is
 important for two reasons.  First, it  is
 useful in identifying costs.  In the example
 above,  if you fail to consider opportunity
 cost, you might not view the program as
 imposing any costs on the  developer; after
 all, four houses were built. However,
 before the program, the developer could
 have built five houses.  Thus, the
 opportunity cost to build a house is a cost
 to the developer of the program.  Second,
 opportunity cost is the basis for the
 discount rate for present value calculations
 (see the example above). If you have the
 choice of spending $50 on a program or
 investing it, the rate of return that you
could receive is the opportunity cost of
spending the money today.
38

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                                                                4.  Assessing the Costs
        Today       Year 1              Year 2
        $50          $50  (1.1) = $55     $55 (1.1) = $60.50
 Thus, in two years, your $50 would be worth $60.50.  Obviously, the $100 you would be
 offered two years from now is worth much more, so it is the better alternative  This
 technique is called calculating the future value.

 Alternatively, you could calculate how much $100 in two years would be worth today  This
 is caUed calculating ^present value.  To calculate this, you use the same interest rate (now
 termed the discount rate) and apply the following formula:

        Today       Year 1             Year 2
        PV=         $0(1/1.1)    +    $100(17(1.1)2)

        PV   =     0            +    82.64



 Either way, the $100 in two years is the better choice.  To understand how present value
 might have implications for ground water protection programs, suppose Program A and
 Program B each cost $500,000, but that the costs for Program A are incurred today  whereas

                      lnCUrre
                                                                             B is
       Amortization is another way to apply the time value of money concept to express
costs in terms of the same time frame.  Amortization is useful if you would like to compare
costs to benefits or calculate cost-effectiveness on an annual basis.

 •    ,  ^difference between discounting/present value calculations and amortization is
simple  While calculating present values involves discounting a stream of future payments
into today s dollars, amortization allows you to allocate present-day, one-time costs (e g
capital expenses) uniformly over a given period into the future.


and in Chafterf* °f am°rtization is Provided in me hypothetical case study in this chapter
                                                                                   39

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  4.  Assessing the Costs
         Incremental Costs

         The last factor to consider in estimating the costs of a ground water protection
  program is incremental costs. These are the costs of a program over and above the baseline
  costs (the costs incurred if an additional program is not implemented, as discussed in Chapter
  6).

         The incremental costs of a program can be assessed by estimating all of the costs
  associated with ground water and ground water protection assuming the additional program is
  implemented, and then subtracting from them the estimated baseline costs.  Another way of
  arriving at these costs might be to isolate the incremental costs associated with an additional
  protection program and estimate them accordingly.
40

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                                                              4. Assessing the Costs
Hypothetical Example:  Assessing the Costs

      "
      1: Select the Cost Estimation Technique

 Theground water program manager elects to use several techniques to estimate the costs
 ot the program, including comparative accounting and modelling techniques (primarilv to
 assess program costs) and survey techniques (to estimate direct and indirect compliance
 Step 2? Estimate the Costs
                  -,
 Costs of Protection Program #1:

 2 additional senior staff at $75,000
 12 additional technical staff at $45,000
 20 additional inspectors at $38,000
 5 clerical/administrative staff at $17,000

 Total
           $150,000
            540,000
            760,000
             85,000

         $1,535,000
 The installation of 100 monitoring wells at $270,000 per well = $27 000 000
       Amortized at 10% for 30 years                           ' $2,860,000 per year

 Operating and sampling costs of 100 wells at $2,000 per well         $200,000 per year
Increased average compliance cost (inspections and enforcement
for firms:
       500 firms at $2,000 per firm
$1,000,000 per year [
                                                                                41

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  4. Assessing the Costs
    Costs of Protection Program #2:

    1 additional senior staff member at $75,000
    1 legal staff member at $70,000
    5 additional technical staff at $45,000
    10 policy staff at $40,000
    4 outreach specialists at $35,000
    10 clerical/administrative staff at $17,000

    Total

    Compliance costs for firms:
          1,000 firms at an average cost of $1,750
         per firm per year to institute new procedures:
         One-time expenses for new equipment:
         100 firms at $20,000  = $2,000,000 total
         amortized at 10% for 30 years
           $75,000
             70,000
           225,000
           400,000
           140,000
           170,000

        $1,080,000
$1,750,000 per year
 Note:  Amortization is used to express one-time costs, typically capital costs, in terms of
 annual expenses, and is based upon the following present value formula:

        PV = x/r [ 1  - (1/1 + r)n]

 To amortize, you solve for x, so the formula becomes:

        x = PV (r)/l - (l/l+r)n

 where:       x is the annual cost
              PV is the value of the one-time capital expenditure
              r is the interest rate
              n is the number of years in the period of analysis
42

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                                                              4. Assessing the Costs
Case Study:
State of Washington
                                                                    Example of
                                                                    Estimating
                                                                    Direct
                                                                    Compliance
                                                                    Costs
 The State of Washington proposed regulations to limit the discharge of
 certain industrial contaminants to its ground water. The regulations
 were to apply to all ground water in the state occurring in soils and
 fully saturated geologic formations, and were prevention oriented (they
 did not specifically address remedial action).  Under the proposed
 regulations, affected businesses would be required to apply for a waste
 discharge permit, adjust their processing technologies to meet the new
 standards, and engage in a variety of monitoring, evaluation and
 reporting activities.

       In accordance with Washington's Regulatory Fairness Act of 1982 the
       ,««rfm«,* Of Ecology commissioned the preparation of a Small Business x^onomic
                 to evaluate the effect of the regulations on small businesses.  In addition
                 Hnmissipned a cost-of-compliance study to be conducted as part of a larger

         :., those with more  than 50 employees).                     S  °mma     y  aiBe


       Small Business Compliance  Cost Study Methodology

n~H«i T° •?k^teuflle °°StS °f comPliance for sma11 firms, the Department of Ecology first
needed to identify those small businesses that would be affected by the regulations  if
determined that only  those business that did not have to comply win thelS present
wa^te discharge standards would be affected.  Thus, the first task was to identify Sesses
tiiat were subject to such standards and eliminate them from further consideration ™
Department identified four types of businesses that fell into this category:

             firms allowed to discharge to surface waters through the National Pollutant
             Discharge Elimination System (NPDES) permit system
     P
     D    firms discharging into wastewater treatment facilities which, in turn  are
           permitted under NPDES

     HI    firms managing hazardous waste and permitted under the Resource
           Conservation and Recovery Act (RCRA) as administered by the State
                                                                                43

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  4. Assessing the Costs


         D     agricultural interests using best management practices and already in
               compliance with Department of Agriculture regulations.

  The Department of Ecology also eliminated interests that were dominated by larger firms and
  thus, by definition, were excluded from consideration in a small business compliance study.
  These large firms included mining and mineral processing, petroleum refining, pulp and
  paper mills, and plywood mills.

      •  The Department divided the remaining firms according to their Standard Industrial
  Classification (SIC) codes.  Based on EPA documents, state records and reference materials,
  and interviews with businesses, it identified the waste streams likely to be generated by small
  firms within theses SIC codes, as well as the actions and types of treatment technologies
  required to comply with the regulations.  The general types of businesses identified included:

        D     feedlots
        D     fruit and vegetable packers
        D     meat processors
        D     diary products
        D     fruit and vegetable processors
        d     sanitation services.

 The Department estimated that these industries comprised 525 small firms in the State.

        To analyze the compliance costs for such a diverse group of industries, the
 Department made the following simplifying assumptions:  1) enforcement levels for the
 various hazardous constituents covered under the regulations would be consistent across
 facilities, rather than permit-specific,  2) representative waste streams and treatment
 technologies could be generalized for each SIC code, and 3) all hazardous constituents
 present in a hazardous waste stream would, if they reached ground water, remain at their
 original concentrations.  These assumptions, although simplified, allowed the Department to
 conduct a consistent analysis of compliance costs for the businesses in question.

        The Department recognized, however, that there were  firm- and site-specific factors
 that should  be taken into account in order for the analysis to be meaningful.   It thus divided
 these firms  into four levels (I-IV) based on several factors, including:

       Level I:      complexity and toxicity of the waste stream
       Level n:     required level of treatment technology
       Level m:    susceptibility of local ground water to contamination
       Level TV:    location of other beneficial uses of ground water.
44

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                                                                4.  Assessing the Costs
  The costs of each compliance activity for each level of firm were estimated through
  interviews with consultants and State records.  These costs are presented below.


        Large Firm Compliance Cost Study Methodology

  ™«   ThC ?ate e.stim,ated ** «* of compliance for industries dominated by large firms bv
  usmg a questionnaire distributed to representative firms in the oil refining, pulped ™£r
  rt ft±£   fT (rePresentatives of ** Dining and mineral proces^mg Kstr? Sd
  S2TS? COStHeSfamates T1^ time ^tted for the study, and are not preset
  ££S'  T^  6HarImTt JOI\cluded ^ sma11 businesses would be disproportionately affected by the
proposed standards due to the substantial economies of scale associated with vari^uT *
                   costs> ^ ** fakly uniform ** of preparing a p6""11 appucation for

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4.  Assessing the Costs


Case Study:
East Dakota Water Development District, South Dakota
                                                                    Example of
                                                                    Estimating
                                                                    Program Costs
 The Big Sioux Aquifer is a shallow glacial outwash aquifer located in
 eastern South Dakota. It underlies about 1,000 square miles of prime
 agricultural land in 13 counties, 11 of which are members of the East
 Dakota Water Development District and/or the First District
 Association of Local Governments, which cooperates with the East
 Dakota District on ground water protection efforts. The aquifer is the
 sole source of water for most of the District's residents.  The area is farmed intensively and
 irrigation is widespread.   The rapid migration of surface water into the Big Sioux Aquifer
 makes it especially susceptible to contamination from both agricultural and industrial sources.


        Estimation Approach

        To address the growing concerns over ground water contamination, the District
 decided that a comprehensive ground water protection program was necessary.  The first
 steps toward implementing the program were identifying the issues of primary concern and
 devising program components to address them effectively. The objective of the program was
 to prevent ground water resources, particularly a shallow sole-source aquifer located largely
 under agricultural land, from being contaminated by agricultural practices.  The District
 decided on a ground water protection program that contained the following components:

        D     a ground water task force
        D     a comprehensive ground water information system
        D     a ground water monitoring system
        D     county and municipal model ordinances
        D     developmental ground water demonstration projects
        D     a public awareness and outreach strategy.

       The next step was to estimate the cost of these individual components. Because the
 two pieces of information needed to estimate each component's cost-price and quantity-were
 not always available, the District broke down each component, whenever possible, into
 individual activities.  Many of these activities, in turn, could be divided further into more
 discrete units. The ultimate objective of this process was to define the program in terms of
 individual elements or activities for which prices and quantities were more readily available.
 In some instances, however, when the means of implementing a component had not been


46

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                                                                 4.  Assessing the Costs


  determined, the District was not able to define it adequately in terms of individual elements
  In these cases, or when costs could not reasonably be assessed for a specific activity (e g
  utilities, overhead, other administrative expenses), the District allocated costs according to
  some "reasonable" fixed percentage.

        The District derived prices from a variety of sources.  In some instances these were
  known with certainty, while in others, prices were based on past experience with similar
  projects and tasks or consultation with experts. Similarly, the District knew in some cases
  the quantity (e.g., 10 maps) or range (5-15 town  meetings to develop a local zoning
  ordinance) of activities required. The fixed percentages used to estimate overhead Expenses
  and the costs of less well-defined programs were  based upon professional judgment and
  wX/wj
        Program Cost Estimates

        The cost estimates for the components of the East Dakota Water Development
 District s Ground Water Protection Program are shown below. This section also describes
 the assumptions relevant to these cost estimates, and when possible, the methodologies used
 to denve the cost estimates.

        Organizing a Ground Water Task Force:  $100. The Task Force was to act as a
 reviewer and expert consultant throughout the program's implementation.  The individual
 activities involved in its organization consisted primarily of staff time and the materials (eg
 envelopes, postage) necessary to notify potential Task Force members.  No cost estimates for
 meetings were included in this component.  The District determined that one workday of
 staff time would be necessary at a cost of about $10/hour, while the cost of materials was
 estimated at slightly less than $20. These estimates were based upon the experience with a
 similar task force formed for a community wellhead protection program in Brookings, South
 jJaKota.

       Developing a Comprehensive Ground Water Information System: $97,170   To derive
 a cost estimate for developing an information system, the District broke down this component
 into four activities.  The first would involve gathering and plotting data on public water
 supply (PWS) wells by location, construction, drillers'  logs, permitted withdrawals  and
 water levels in the surrounding areas.  Because gathering information on the District's 42
 PWS wellfields would require collecting data from existing sources rather than new research
 the District estimated that only a modest level of staff time was required (approximately 2  '
hours per wellfield at a price of $10 per hour). Overhead expenses (phone calls, paper  etc )
                                                                                   47

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  4. Assessing the Costs


  were estimated at 20 percent of salary expenses, or $80.  The total cost estimate for this
  activity was approximately $500.

        The second activity was the preparation of county-wide aquifer maps at a total cost of
  $20,000. The District arrived at this figure by assuming that 11 maps would be prepared by
  the South Dakota Geological Survey (SDGS) at a cost of slightly less than $2,000 per county.
  This price estimate was based on a consultation with the SDGS, who also stated that the
  price could have been as high as $200,000 per county, but could be reduced because SDGS
  had already conducted much of the extensive hydrogeologic mapping required.

        The third activity was a delineation of wellhead protection areas around existing PWS
  wellfields. The District wanted to use the most sophisticated method of delineation given the
  existing data (in this case,  a uniform flow analytical model with a 10-year time of travel)
  The total cost for the delineations was estimated at $60,000.  Of this, nearly $50 000 was
  devoted to salaries (assuming 10-11 staff weeks per county at approximately $10 per hour)
  An additional 20 percent of salaries was included as overhead and a nominal $400 was
  budgeted for travel. (Again, the cost would have been higher if the SDGS had not already
  conducted extensive hydrogeologic mapping.)

        The last element of the information system was a geographic information system
 demonstration project covering 30 square miles, at an estimated total cost of $16,670.  Most
 of the administrative work  on this task was donated by a retired State University faculty
 member for a nominal fee of about $6,000.  The remaining costs would be for salaries (for
 graduate student labor) and administrative expenses.  Aerial photography would be provided
 by a local firm at no cost.  This estimate was based almost entirely upon discussions with the
 project administrator.

       Installing a Ground Water Monitoring System:   $25,000. To estimate the cost of this
 system, the District assumed that the SDGS would install 3 to 7 monitoring wells around 8 to
 10 selected shallow wellfields within the District.  About 50 wells would be drilled and
 constructed using 2" PVC pipe, 10'  screens,  and an average well depth of 24'   The price
 was estimated at $450 per well  ($23,000 total). All installation cost assumptions were based
 upon consultation with SDGS staff.  The District also assumed that an additional four weeks
 of staff time (roughly $1,600) would be required for administrative oversight, as well as the
 standard 20 percent of salaries ($330) for overhead expenses.

       Developing and Implementing Model Ordinances: $115,000.  The District divided
 this program component into two elements:  ordinance development and ordinance
implementation.  It further determined that it would need to develop both a country and
municipal ordinance that would be incorporated into existing local zoning regulations. The

48

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                                                              4. Assessing the Costs



  goal of these model ordinances was to make it easier for local communities and counties to
  adopt ground water protection regulations.  The District also wanted the ordinances to be

  SSS ?f t0, UnderStand' ** free from «»*«« legal  terminology.  As a result, the
  Distnct did not incur any legal fees.  The cost of developing a county ordinance was

  rZSnEt r   H bf^ P^rily on previous experience with a similar ordinance passed
  in Brookings County, South Dakota.  Because there was less experience in developing
  community ordinances, the District felt more effort would be required for this element  and

  ai 30^* T E! Jin'000',  ™e t0tSl ** fOT ***** thelwo ordman^ wS
                               ' ^ 2° Per°ent administrative ^Penses  and $500 for
nut* *mPlementin£je ordinances was by far the most expensive single component of the
Distnct s program.  This effort called for one-on-one technical assistance with local

                 1         timated        ^ °f ** imPl-entatio"eff*rt a^lih
                          i i               ^ °  * mPl-entatioeffrt alightiy
 over $9,000 per county for 11 counties ($100,000). Because of the many meetings required
 travel costs were significant ($4,000). Staffing costs amounted to roughly $ToOO ^    '
 coun^or almost 18 staff weeks per county.  Standard administrative ex^nses^ almost



       Developing Ground Water Demonstration Projects:  $55,000  This
 component consisted of several individual projects to encouraged
         in      i                        Water ^ weUs to         g av
     use m agncultural areas.  Because of their development nature, the estimated costs of

                                     -  ™6 District tended to "^ a doUafamTnt t a
                                    to allocate costs within this estimate  It also

              erCentaeS SU                   °ne activity ^^ for more
       For example, one project would entail cursory field checks of deep wellfield areas to
      ^f fcTnt"li elev?tion' iocal drainage ^d nearijy coJSS SurcS    to
Travel coste for this effort would be substantial, and were estimated at $4 000  An
additional $5,000 in staff time was allocated for inspection of the 38 deep' weMeW areas in
the Distnct, plus $1 000 in overhead.   Two technicaUssistance projec?delS2 to^SucT
die contomination of rural domestic wells and promote alternative land use L crTtiSl
wellhead protection areas were estimated to cost $5,000 each. For these two protects
  Ptely 80   rnt of ^ «* was
™                                                  ^     an>
split between overhead and travel costs.  A fourth demonstration project wouldhivolvl
promoting the development of contingency plans to address spills of hazardous oftoric
matenals within or along streams upgradient of wellhead protection areas  at a cost of
                                                                               49

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  4. Assessing the Costs


  $15,000. The allocation of costs within this project was similar to that of the two previous
  demonstration projects.

        Developing a Public Awareness and Outreach Strategy: $35,000.  This final
  component called for the State Department of Transportation to install educational and
  caution signs where major roads intersect wellhead protection areas.  The signs were
  assumed to be 2' x 4' and cost $100 per sign.  Eighty signs would be installed, and 20
  additional signs would be held in reserve as replacements, for a total cost of $10,000.
  Installation costs were estimated at $4,000, and oversight and administrative costs were
  estimated at $800 and $200, respectively.

        Another element of the strategy consisted of a training course on ground water
  protection issues, brochures, videos, slides,  and articles for publication. The video would be
  contracted out at an estimated cost of $4,000.  Travel expenses associated with the training
  courses were estimated at $2,000.  The outreach and educational materials were to be
 prepared in-house at a cost of about $12,000 (30 staff weeks) and slightly  more than $2,000
 in overhead expenses. The total cost of this element was estimated at $20,000.

        Summary of Total Costs

        The total estimated cost of the East Dakota Water Development District's ground
 water protection program was $198,270.

        Program Components

          Organize task force                                            $100
          Develop information system                                  97 170
          Install monitoring system                                     25*000
          Develop and implement model  ordinances                     115*000
          Develop demonstration projects                               55*000
          Develop public awareness and outreach strategy                 35,'oOO

                Total cost of program                              $198 270
50

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                                                     5.   Analyzing  Cost-
                                                                Effectiveness
 Cost-effectiveness analysis is useful in evaluating the various options for carrying out a
 ground water protection program, particularly if the program's budget is fixed  For
 example, when a given quality standard or certain level of protection must be met cost-
 etfectiveness analysis is often used to arrive at the least-cost method of achieving  that goal
 Alternatively this technique is useful in determining a quality standard or level of protection
 that can be achieved for a given amount of money.

       Cost-effectiveness analysis is also useful in determining the value of incremental
 changes in programs (adding or subtracting one component) in terms of the amount of
 protection they afford per dollar spent. For example, suppose that a community is
 considering eliminating one of its three program components for budgetary reasons  The
 first two components cost $40,000 and reduce aquifer contamination by 70 percent '(a
 «£n™5p®rcentcontamination  reduction per dollar spent). The third component costs
 $5,000 and raises the level of protection to 95 percent (a 0.0021 percent reduction per dollar
 spent).  In this case, the third component, which has an incremental cost of 12 percent will
likely be regarded as worthwhile because it provides a 26 percent increase in protection.

      The cost-effectiveness of protection programs can be expressed in several ways
including:                                                     .             ^ '
       D
       D
       D
       D
units of pollution prevention achieved per dollar spent
units of pollution prevention achieved for programs of equal cost
dollar cost per unit of pollution prevention achieved
dollar cost of programs that prevent equal units of pollution.
                                                                                 51

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  5.  Analyzing Cost-Effectiveness
  Cost-effectiveness analysis can be employed to compare program options that encompass:

        D     different types of protection methods (e.g., zoning versus permitting)

        D     combinations of protection methods (e.g., monitoring, permitting, and
               enforcement systems versus monitoring, education, and zoning)

        D     similar methods at different levels of implementation (e.g.,
               •fnur Tnnf»c^
 four zones).
                                                       one zone versus
        To evaluate the effectiveness of ground water protection
 program options, it is therefore necessary to measure the expected
 results of each option in comparable units.  Establishing a
 standardized measure of pollution prevention will allow you to
 compare the effectiveness of different program options.  The measures
 of pollution prevention may include:
                                                         The
                                                         Importance of
                                                         Comparable
                                                         Units
        D
        D
        D
        D
        D
        D
level of contaminant reduction in the aquifer (ppb)
percent reduction of contaminant in the aquifer
probability that a contamination incident will occur
units of contaminant prevented from reaching the aquifer
percentage of contaminant prevented from reaching the aquifer
probability that a contamination incident will be prevented.
       Because accurate measures of pollution prevention are often impossible to obtain
 unless sophisticated aquifer monitoring and mapping have already been conducted, it may be
 necessary to develop estimates or proxy measures of program effectiveness. A common
 proxy or estimate of the effectiveness of a zoning program, for example, would be the
 quantity or units of a contaminant prevented from reaching the aquifer as a result of the
 contaminant's prohibition.  In the State of Wisconsin case study at the end of this chapter,
 pollution prevention is measured in terms of the pounds per year of atrazine active ingredient
 prevented from potentially  contaminating the aquifer.

       It is also possible to use engineering texts and other technical studies to obtain
 potential measures of pollution prevention.  For example, if a program manager wishes to
 evaluate the effectiveness of different treatment technologies, these technical references could
provide specific data on the amount of each contaminant removed by each treatment
 technology (e.g.,  granular activated carbon filters versus aeration).  Alternatively, he could
52

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                                                        5.  Analyzing Cost-Effectiveness


consult experienced technical staff (e.g., staff hydro-geologists, engineering firm personnel
academics) to obtain these data.                                                      '

       This chapter presents a step-by-step guide for conducting a cost-effectiveness analysis
As shown in the box below, three of these steps (defining a program, establishing the
baseline, and assessing the costs) were covered in previous chapters and are not repeated
here.  Please refer to these chapters, when appropriate, for more detailed discussions
                          Steps in a Cost-Effectiveness Analysis

         Define a Ground Water Protection Program (Chapter 2)

                set a goal
                set objectives
                define options
                identify impacts

         Establish the Baseline (Chapter 3)

               define the baseline
               quantify the baseline
               consider factors that increase or decrease baseline estimations
               consider the probability of baseline bias

        Estimate the Effectiveness of Program Options

        Assess the Costs  (Chapter 4)

               select costs
               select the  cost estimation technique
               estimate costs

        Evaluate Cost-Effectiveness
                                                                                    53

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 5.  Analyzing Cost-Effectiveness
 Estimate the Effectiveness of Program Options

 Using the standardized measure of prevention you selected, you can estimate the
 effectiveness of a program option and compare it with the effectiveness of other options.
       When selecting the program's goal and objectives, the program
manager determines the level of effectiveness he or she wishes to
achieve.  Program options can then be removed from consideration if
they do not meet this level.
                                                                      Comparing
                                                                      Program
                                                                      Options to the
                                                                     Baseline
       To realize a program's true effectiveness, you must take into
account the baseline calculation (see Chapter 3).  This involves
subtracting the baseline from the effectiveness of a program option to yield the incremental
or marginal effectiveness of the program.  Thus, it is important that the baseline and the
programs being evaluated are both expressed in comparable units.  The hypothetical example
at the end of this chapter illustrates one use of the baseline in a cost-effectiveness analysis.
                                                                    Timing
                                                                    Factors
       In addition to measuring the effectiveness of the program
 options in comparable units and taking the baseline into account, you
 should also consider timing factors. For example, suppose Program A
 protects 2,000 people annually for three years, while Program B
 protects 1,000 people annually for ten years.  On a unit (per person)
 basis, Program A is more effective. However, accounting for the duration of the two
 programs, Program B is more effective.


       Factors Affecting the Estimation of Effectiveness

       Two factors limit or complicate the conduct of a cost-
 effectiveness analysis.  The first is the presence of multiple
 contributing factors (e.g., more than one contaminant or source of
 contamination for an aquifer), which make the determination of a
 standard measure of effectiveness more difficult. To address this situation, one approach is
 to assume that all contaminants are of equal importance. Thus, a program that reduces the
 concentration of contaminant A by 5 percent is as effective as a program that reduces
 contaminant B's concentration by 5 percent. Alternatively, when several contaminants are
present, it is also feasible to develop a prioritizing scale on which all contaminants can be
placed relative to one another.  The scale will likely be based  on the relative risk each
                                                               i

54
                                                                    Limiting
                                                                    Factors

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                                                        5.  Analyzing Cost-Effectiveness


  contaminant poses, or on some other criterion developed by the program manager  If
  contaminant A poses a greater threat and is therefore a higher priority than contaminant B  a
  program reducing the concentration of contaminant A is more effective than one that reduces
  contaminant B's concentration by 5 percent.                                      i*uuw»

        The second is disparate program options.  This factor limits cost-effectiveness
  analysis because of the difficulty involved in finding standardized measures with which to
  compare the options.  For example, suppose that zoning and public education are two options
  being considered for a ground water protection program. Both have the same ultimate
  objective of reducing the amount of contamination that reaches the aquifer, but the methods
  for measuring to effectiveness differ.  The measurement of zoning's eff^tiveness wiT
  likely be based on the expected reduction of contaminants in the zone  while the
  measurement of public education's  effectiveness is usually based on the number of people
  who receive information. Because  it may not be possible to develop a suitable  measure of

                                                            0t be able to
 Evaluate Cost-Effectiveness

 Each program option that meets the quantified effectiveness objective and is within the
 program office's budgetary means should be evaluated for its cost-effectiveness   Cost-
 effectiveness options can be compared using two basic approaches:

       When the program office is under budgetary constraints or when specific levels of
 pollution prevention are to be achieved, use:

       D     dollar cost of programs that prevent equal units (or levels) of pollution or
       u     units (or levels) or pollution prevention achieved for programs of equal cost.

 When seeking the option that will maximize pollution prevention per dollar spent, use:

       D     units (or levels) of pollution prevention achieved per dollar spent or
       Q     dollar cost per unit (or level) of pollution prevention achieved.

The hypothetical example below illustrates the evaluation of cost-effectiveness.
                                                                                   55

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                                                                        Sensitivity
                                                                        Aflalysis
 5.  Analyzing Cost-Effectiveness


       Sensitivity analysis is the testing of results due to changes in
 assumptions.  In developing the estimates of effectiveness and costs, it
 is likely that, where precise data are not available, a number of
 assumptions were made to complete the analysis. Varying the
 assumptions will highlight weaknesses in the analysis that are
 important to decision making.

       Testing the sensitivity of the final results to a particular assumption is merely a matter
of altering the assumption, re-calculating cost-effectiveness according to new assumptions
and noting the changes in the final results for the options being compared. If the change is
significant, more data may be necessary to fully understand the impact of the change
56

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                                                     5.  Analyzing Cost-Effectiveness
Hypothetical Example:  Analysing Cost-Effectiveness

 ======s========s==s=s===s====s=s=s=====^^
  Comparing the Program Options to the Baseline
 Recall from Chapter 3 that the ground water program manager from Fairhomes County
 estimated the number of people affected by contamination under the baseline to be:

        Private well users:   800 people
        Public well users:   40,000 people
Two alternative protection programs to be evaluated using cost-effectiveness analysis
1) zoning restrictions and new standards for businesses, and 2) monitoring, enforcement
and remediation.                                                                '
                                                                              are-
                                                                                 "
 For simplicity, the program manager estimates that both programs will protect 100
 percent of the public well users from contamination.  However, only the zoning program
 will protect the 800 private well users.  Thus, the total number of people protect unTr
 tne two programs are:

       Program #1:  40,000
       Program #2:  40,800.
Evaluating Cost-Effectiveness
   P        , f    1       6neSS anjdyS1S fa Fairhomes Bounty, the program manager
 takes the cost of each program option developed from Chapter 4 and divides by the
 number of people protected. The results of this calculation are shown below:

       Program #1:  5,575,000/year H- 40,000 = $139 per person/year

       Program #2:  3,040,000/year -=- 40,800 = $74 per person/year.

Thus, Program #2 is more cost-effective on a per-person basis.
                                                                                57

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5. Analyzing Cost-Effectiveness


Case Study:
State of Wisconsin
                                                                    Example of
                                                                    Establishing
                                                                    Standard
                                                                    Measures of
                                                                    Prevention
 Ground water monitoring initiatives in Wisconsin discovered that
 atrazine (a herbicide commonly used in corn crop production to reduce
 weeds) contamination was more widespread than originally thought.
 Consequently, the Wisconsin Department of Agriculture, Trade, and
 Consumer Protection (DATCP) proposed amendments to the 1991
 Atrazine Rule, to be implemented in 1992.

       Although the DATCP did not undertake a formal cost-
 effectiveness analysis to compare alternative programs, their approach encompassed many of
 the steps necessary to develop a case study. Information not reported in their Environmental
 Impact Statement, but necessary to complete the cost-effectiveness analysis case study  was
 obtained by contacting the DATCP for further estimations.


       Proposed 1992 Amendments

       The 1992 proposed amendments were developed with the same objective as that of the
 original Atrazine Rule:  "to minimize the level of atrazine in ground water to the extent that
 is technically and economically feasible." The amendments call for the establishment of five
 atrazine management areas (AMAs) and eight prohibition areas (PAs).  These areas would be
 in addition to one AMA and six PAs established under the original Atrazine Rule  The
 additional AMAs would be subjected to stricter maximum atrazine application rules based on
 the type of soil in which crops are planted.


       Estimated Effects of Proposed Amendments. The effects of the proposed
amendments were estimated in terms of the anticipated reduction of atrazine active ingredient
applied to corn crops in pounds per year  (ppy).  To estimate this reduction, it was necessary
to incorporate estimations on present atrazine use, soil characteristics, and types of corn
produced in the delineated  AMAs and PAs.  The general estimations for AMA and PA
conditions included the  following:

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                                                       5. Analyzing Cost-Effectiveness
             Total      Acres Dedicated to   Acres Dedicated to Corn Production to
             Acreage   Corn Production     which Atrazine is Applied**
  AMAs*    700,000   350,000 (50%)       175,000 (50%), of which 157,500 (90%) are
                                            planted in fine to medium soil and 17,500
      ..	(10%) are in course soil
  PAs*      24,000     18,000 (50%)        9,000 (50%)
**
        12,000 AMA acres (2 percent) are overlapped by PAs
        The average application rate of atrazine to corn crops is 1.4 pounds active ingredient
        per year, based on survey results.


        Estimated Atrazine Reduction in AMAs: The present average application of atrazine to
 corn crops ' O^ppy), multiplied by the estimated AMA corn acres to which atrazine is
 nSxm 175'r°°e' ?****. ±& amount of atrazine active ingredient currently applied in AMAs
 (245,000 ppy). Subtracting from this figure the maximum amount of atrazine active
 ingredient that could possibly be applied under the proposed rates (170,626 ppy), resulted in

                            ** active ***** in *• AMAS under *• proposed
       Estimated Atrazine Reduction in PAs: The present average application of atrazine to
   ™PS ( i  ?Py)' ^^P11^ fey «* estimated PA corn acres to which atrazine is applied
  ,000), equals the amount of atrazine active ingredient currently applied in PAs (12 600
ppy).  This figure is also the estimated reduction of atrazine active ingredient in the PAs
under the proposed amendments.

       Total Estimated Atrazine Reduction:  The sum of estimated atrazine reduction in the
additional AMAs and PAs (86,974 ppy) needed to be adjusted slightly to account for the
12,000 acres of AMAs that are overlapped by PAs.  Subtracting approximately 1,490 ppy (or
2 percent) from the sum resulted in a total reduction estimate of 85,484 ppy atrazine active
ingredient.
                                                                                  59

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  5. Analyzing Cost-Effectiveness


        Estimated Program Costs of Proposed Amendments. The DATCP estimated the
  incremental program costs of implementing the proposed amendments in terms of the
  additional monitoring and enforcement staff and equipment necessary.  Annual program costs
  were estimated at $103,900, while one-time equipment costs would amount to approximately
  $18,800.  Assuming that equipment costs are amortized over an indefinite period at 10%, the
  total program costs were estimated  at $105,780 per year.


        Estimated Compliance Costs of Proposed Amendments.  Compliance costs were
  estimated in terms of the increased cost per acre of corn production as a result of the partial
  or total substitution of other herbicides for atrazine, or the implementation of alternative
  weed reduction measures.

        Estimated Compliance Costs in AMAs:  The AMA acres to which atrazine is applied
  to sweet and seed corn crops at rates exceeding those proposed (20,396), multiplied by the
  average cost increase of reducing atrazine in sweet and seed corn production ($7.5 per acre)
  equals the cost of reducing atrazine application to these crops in the AMAs ($152,972).

        The AMA acres to which atrazine is applied to field corn crop production at rates
 exceeding those proposed (96,154),  multiplied by the average cost increase of reducing
 atrazine in field corn production ($5 per acre), equals the cost of reducing atrazine
 application to field corn crops in the AMAs ($480,769).

        The total compliance cost of reducing atrazine maximum application rates to all corn
 crops in the AMAs was thus estimated to be $633,741.

       Estimated Compliance Costs in PAs: The PA acres  to which atrazine is applied  to
 sweet and seed com crops (1,350), multiplied by the average cost increase due to the
 elimination of atrazine application in sweet and seed corn production ($10 per  acre), equals
 the cost of eliminating atrazine application to these crops in the PAs ($13,500).

       The PA acres to which atrazine is applied to field corn crops (7,650), multiplied by
 the average cost increase due to the elimination of atrazine in field corn production ($7.5 per
 acre), equals the cost of eliminating atrazine application in field corn crop production in the
 PAs ($57,375).

       The total compliance cost of eliminating atrazine application practices in corn crop
production in the PAs was thus estimated to be $70,875.
60

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                                                       5.  Analyzing Cost-Effectiveness
        Total Estimated Compliance Costs:  Based on the above estimates, the total
  compliance cost of the proposed 1992 amendments would be an increase in the cost of corn
  production of $704,616, less $12,675 (to account for the approximately 2 percent of the
  AMAs that are overlapped by PAs), or $691,941.
        Alternative Option
        An alternative option to the proposed amendments was evaluated by the DATCP
 Under this alternative program, atrazine application would be prohibited in the AMA
 established under the 1991 Atrazine Rule, as well as the additional AMAs and PAs
 delineated by the 1992 proposed amendments.


        Estimated Effects of Alternative Option.  The effects and compliance costs of this
 option were calculated in exactly the same way as those for the proposed 1992 amendment!
 A*~  •                  Reduction in Existing AMA:  The AMA established under the 1991
 £SS£ UllhC°nS1StS °f 25'°°? acres' 6'250 of which are applied with atrazine in corn
 production  The maximum application rate for this AMA was set under the alternative
 option at .75 ppy, limiting the total amount to 4,688 ppy of atrazine active ingredient.

       Estimated Atrazine Reduction in New AMAs:  The AMAs delineated under the 1992
 proposed amendments would essentially be prohibition areas under the alternative option
 Returning to the discussion above on the estimated atrazine reduction under the proposed
 amendments, the amount of atrazine active ingredient currently applied in the AMAVwas
 estimated to be 245,000 ppy, all of which  would be prohibit edunder the ^alterative option.

       Estimated Atrazine Reduction in New PAs:  The eight PAs proposed under the 1992
 amendments are also included in the alternative option.  The total reduction of atrazine active
 ingredient in the PAs was already estimated to be  12,600 ppy.

* *   Tot°!^tim£"ed Atrazine R^vcti™ The reduction of atrazine active ingredient due
             °n   ^
 o h*       i                    ** new AMAs' IBad ** new PAs was estimated
to be 262,288 ppy Jess ^4,496 ppy (to account for the approximately 2 percent of AMAs that
                                                                                  61

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  5. Analyzing Cost-Effectiveness


        Estimated Program Costs of Alternative Option. The DATCP estimated the annual
  program costs of the proposed 1992 amendments at $103,900, with $10,500 of this attributed
  to support work to administer the program.  Estimating that the demand for support work
  would be reduced by 30 percent if the prohibition of atrazine was adopted (as opposed to
  maximum application limits), the annual program costs of the alternative option were
  estimated at $100,750. One-time equipment costs would be the same, approximately
  $18,800.  Assuming equipment costs are amortized over an indefinite period at  10%, total
  annual program costs were estimated at $102,630.


        Estimated Compliance Costs of Alternative Option.  Compliance costs were again
  estimated in terms of the increased cost per acre of corn production due to the substitution
  other herbicides for atrazine, or the implementation of alternative weed reduction measures.
  The following estimations were made with respect to increased production costs:

        D    the average cost per acre of eliminating atrazine, in any type  of corn
              production, in areas currently subject to AMA maximum application rates
              would be $2.5

        D     the average cost per acre of eliminating atrazine in the production of corn in
              areas now subject to state maximum application rates would be $10 for sweet
              and seed corn, and $7.5 for field corn.

       Estimated Compliance Costs in Existing AMA: Of the 6,250 acres in the existing
 AMA to which atrazine is applied in corn production, approximately 938 are dedicated to
 sweet and  seed corn, and 5,312 to field corn.  Multiplying each of these amounts by the
 average increased cost of eliminating atrazine use from the existing AMA maximum
 application rate  ($2.5 per acre)  resulted in estimated increased costs of $2 345 for the
 production of sweet and seed corn and $13,280 for field corn.  The total estimated
 compliance costs in the existing AMA were thus estimated at $15,625.

       Estimated Compliance Costs in Additional AMAs:  The AMA acres to which atrazine
 is applied to sweet and seed corn crops (30,625), multiplied by the average cost increase of
 reducing atrazine in sweet and seed corn production ($10 per acre), equals the cost of
 reducing atrazine application to  these crops in the AMAs ($306,250).

       The AMA acres to which atrazine is applied to field corn crop production (144,375)
 multiplied by the average cost increase of reducing atrazine in field corn production ($7.5
per acre), equals the  cost of reducing atrazine application to these crops in the AMAs
 ($1,082,813).

62

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                                                     5.  Analyzing Cost-Effectiveness
       The total compliance costs of reducing atrazine maximum application rates to all coin
 crops in the AMAs were thus estimated to be $1,389,063.

       Estimated Compliance  Costs in PAs:  The PA acres to which atrazine is applied to
 sweet and seed corn crops (1,350), multiplied by the average cost increase due to the
 elimination of atrazine application in sweet and seed corn production ($10 per  acre) equals
 &135W)    minating atlazine aPPlication * sweet and seed corn crop production in toe PAs


       The PA acres to which atrazine is applied to field corn crops (7,650), multiplied bv
 the average cost increase due to the elimination of atrazine in field corn production ($7 5 ner
 PAs ($^375   M °f eUminating atrazine «BPH«*» « field corn crop production in the
nr^H  H—    c°mpUance c081 of eliminating atrazine application practices in corn crop
production in the PAs was thus estimated to be $70,875.

      Total Estimated Compliance Costs:  Based on the above estimates  the total
                                       ^ bC " *"*** fa ** "* Of m Pro
                                           approximately 2 p~Bt of *• AMAs

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  5. Analyzing Cost-Effectiveness



        Cost-Effectiveness


        The cost-effectiveness of the proposed amendment plan and alternative plan was
  estimated by dividing the reduction of atrazine active ingredient by the cost of implementing
  each option.




 _ _ _      Proposed Plan                  Alternative Plan
                                       .81 ppy/dollar                    2.5 ppy/dollar
  Costs Only                   (85,484 ppy/$105,780)           (257,792 ppy/$102,630)


  Program and                         .11 ppy/doUar                    .17 ppy/dollar
  Compliance                           (85,484 ppy/                    (257,792 ppy/
  Costs _ ($105,780 + $691,941)) _ ($102,630 + $1,450,268))



       The alternative plan, although slightly more cost-effective, failed to meet the
 "economic feasibility" requirement of the State's legislation; therefore, the original plan was
 proposed in the 1992 amendments.
64

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                                                    6.   Analyzing  Costs
                                                               and Benefits
 monft            -              of benefi* to costs.  This type of economic analysis is
 whlff emi?0yed m determining ** meri* of a particular program and when deciding
 whether to implement a program or one of its components.                    «*«ung

                         -b^fit analysis can be expressed in one of two ways. The first
                                           «~ ****** are calculated by
on «,  EvalYatio"s °f *° c08* a*1*1 Befits of ground water protection programs are based
               at     ^  ""   ^ ^^ m meaSUrable ^ « be
 ofce   Ini re,rf   H                                        e compar   to
 other. In this regard, a balanced perspective is essential. A balanced cost-benefit analysis
 c±±   'T'n °f ^ °f " Pr°gram'S ^^ «* ^ benefits (e-g  boTAe
 SSST T    ^^ mCUfS M ^ result °f a Sround water Protection pogram all
 the benefits it gams from having a source of clean ground water).
 Pcrin^t    Chapter /reSentS •" i11^11010^ discussion of the types of benefits that are
 estimated for ground water protection programs, and then presents the steps to be taken in
 conducting a cost-benefit analysis. As shown in the box on the next page? several TSes
 steps have been covered in previous chapters, and are not repeated here
Identify the Types of Benefits
dvfr                               Pr0tecti°n program ^ one of *»° fo™s that
denve from the ground water's use as a commodity or as a resource.  These types of benefits
are discussed below in more detail.                                    yp^    oenents
                                                                               65

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  6.  Analyzing Costs and Benefits
                             Steps in a Cost-Benefit Analysis

          Define a Ground Water Protection Program (Chapter 2)

                 set a goal
                 set objectives
                 define options
                 identify impacts

          Establish the Baseline (Chapter 3)

                 define the baseline
                 quantify the baseline
                 consider factors that increase or decrease baseline estimations
                 consider the probability of baseline bias

          Assess the Costs (Chapter 4)

                select costs
                select the cost estimation technique
                estimate the costs

          Identify the Types of Benefits

          Estimate the Benefits

          Evaluate Cost-Benefits
       Commodity and Resource Benefits

       Ground water benefits can take two forms.  The first is the
benefit accruing from the use of ground water as a commodity for:
                                                                    Benefits
       D    drinking water (individual use)
       D    agricultural uses
       D    industrial applications.
Commodity
66

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                                                        6.  Analyzing Costs and Benefits
  Because markets usually exist for these uses of water (people will pay for them), these
  benefits of water are given a price. This price represents a measure of the commodity value
  of ground water. Ground water can also be viewed as a commodity through its interaction
  with surface waters. Its commodity value is based on the value of the surface water
  ecosvstem                                                                «c«x,i
ecosystem.
        The second form of benefit is resource benefits. These
 include:                                                               „
                                                                       Resource
        n    *u                                                       Benefits
        u    the benefit of being able to use the ground water as a      _
              resource at some time in the future (generally termed            " -
              "option values")

        D    the benefit of having a source of clean water for future generations (the
               bequest value")

        D    the benefit of knowing  the ground water is uncontaminated, even if there is no
              expectation that it will have to be used ("existence values").

 Other types of resource benefits, such as  recreation value, are frequently measured for such
 water resources as lakes, wetlands and streams, but have 'not bee^applied to^rould"
«™«! ^T5! Tk£tS generally do not exist f°r ^source benefits, they are usually not
pnced.  Instead, they are captured by what is called "consumer surplus," a term^sed to

                l° mdlVidUalS "ld bUSineSS6S ** C°nSUme g™nd water <» *S on the
nrn^n                                    benefits of y°ur ground w*ter protection
S2ET* ^ T fU  t0 *"* °f ^ " terms of direct ^ indirect and primary and
secondary benefits, just as you did for costs in Chapter 4.

       D     Direct benefits are the benefits realized by governments, firms, and individuals
             who are directly affected by the program.  An example of a direct benefit is
             avoiding the costs of having to develop an alternative supply of ground water.

             Indirect benefits are the benefits passed on to others. An example would be a
             firm s decision to expand as a result of protection measures that ensure water
             quality.
                                                                                    67

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  6.  Analyzing Costs and Benefits
                                     Consumer Surplus

      To capture all of the benefits that consumers gain from a clean source of water, it is
      necessary to estimate their willingness to pay for uncontaminated ground water, in
      terms of both its commodity and resource values.  A partial measure of the benefits
      of water is a  "commodity value," which is simply the total expenditures made for
      ground water. But for any commodity, including ground water, different consumers
      will be willing to pay different prices for the commodity.  Taken together, their
      willingness to pay represents the total demand for water (or the demand curve).
      Because consumers generally face a single price for water in the marketplace, there
      will be consumers who would have been willing to pay more for water than the
      market price.  Summing these consumers' excess willingness to pay and subtracting
      from it what they actually do pay yields the "consumer surplus."

      The amount that consumers are willing to pay will reflect three different types of
      values:
            D
            D
            D
the commodity value and consumer surplus associated with consuming
clean drinking water, which reflect the amount of water people feel
they need and the value they associate with not being exposed to health
risks through their water supply

the consumer surplus associated with knowing that water is available
for use in the future or for future generations (option and bequest
values; these values have no price and thus no commodity value)

the consumer surplus associated with knowing that ground water is
clean,  even if there is no intent of using it in the future (the existence
value).
     "Producers" of ground water (e.g., water utilities) also receive benefits in that they
     receive a payment for providing water to consumers.  However, if you calculate the
     amount consumers pay for ground water and include it as a portion of the benefits
     consumers receive (i.e., its commodity value), then you cannot also count the
     payment received by the producer as a benefit. This would be double counting.
68

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                                                        6.  Analyzing Costs and Benefits


         D    Primary benefits are Mt by an individual, firm, or industry as a result of
               changes brought about by a program.  Clean drinking water is an example of a
               primary benefit.

         D    Secondary benefits are the benefits of a program that "spill over" from those
               who incur primary benefits to the rest of the economy. For example if a
               large manufacturing firm relocates into a community to take advantage of a
               protected source of ground water (a primary direct benefit), the additional jobs
               resulting from the firm's relocation are primary indirect benefits.  However if
               the demand for goods and services created by these new jobs causes additional
               firms to start up or relocate into the community, these new jobs are secondary
               benefits.  Because secondary benefits are very complex to estimate, they are
               not discussed further in this guidebook.  However,  if your program office
               decides to calculate secondary benefits, it should also calculate secondary
               costs.                                                             J


 Estimate the Benefits


 p?o ^"fr^SurctPreSCntS ^ greatCSt Challenge in conducting a cost-benefit analysis.  A
 example, may be difficult to quantify because they arTSLgiblf °How^ raoSS' **
 benefits are no less important than commodity benefits (such as the value of using
 uncontaminated water for agricultural crop production), and should be evaluated  in a
               vay if possible.   Cost-benefit analysis provides a framework for making this
               it may not always be practical or even possible to measure benefits directly,
   „ u •   "'i."   method is to estimate the program's costs, and then estimate the losses in'
well-being that are avoided by implementing a program that improves or maintains the
quality of ground water relative to the baseline (see Chapter 3).' This practical technique
allows the estimation of the benefits that derive from the avoided costs of treatment
alternative ground water supplies, and the damages associated with contamination.  '



   1 It is important to remember that protection initiatives such as the Wellhead Protection Program
wnne not actually improving the quality of ground water can yield real benefits bv monitn  "  th   '

Z^±r±,=!- ft^^at±,baSd'11f T^" """P— "" HWta-'-d
                           tnese avoided baseline costs of a protection
                                                                                   69

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  6. Analyzing Costs and Benefits


        The remainder of this chapter discusses the four techniques used for estimating
  benefits to individuals and businesses. These are:

        D     Avoided cost.  This method estimates the costs that individuals or businesses
               would incur (e.g., for water treatment, alternative supplies) in the absence of a
               ground water protection program as the "benefits" of the program.

        D     Health risk assessment.  This subset of the avoided cost technique measures
               the benefit to individuals of avoiding increased illness or risk of cancer by
               protecting ground water from future contamination.  In other words, it
               substitutes the risk of disease for monetary costs as a measurement of avoided
               costs.

        D     Contingent valuation.  This survey  method is used for measuring the total
               willingness to pay for the various attributes of ground water.

        D     Hedonic pricing.  This  technique uses property values to determine the value
               of one attribute of property, such as ground water quality.


        The Avoided Cost  Method

        An important technique for estimating the commodity benefits that individuals and
 businesses will realize from ground water protection programs is the avoided cost method
 This technique estimates the  costs that would be incurred in  the absence of a ground water
 protection program. Because a ground water protection program is designed to detect,
 respond to, or treat contamination, it avoids these  costs,  which are treated as  "benefits" of
 the program and are called avoided-cost benefits.  Looking at costs in order to reveal
 benefits may seem counter-intuitive, but it is actually a common way of justifying actions to
 prevent an unwanted event from occurring.  For example, the benefit of changing the oil in a
 car can be characterized as the avoided cost of major engine repairs.

       Avoided cost is a frequently used benefit estimation technique, both because it is a
 common sense approach and  because the information necessary to estimate avoided costs is
 often readily obtainable. Ground water managers are generally familiar with the  specific
 types of treatment processes required for different  types of contamination, and many
 communities have undertaken detailed analyses of the costs of treating contamination events
 that they have experienced.
70

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                                                       6.  Analyzing Costs and Benefits


        The use of the avoided cost technique is premised on response costs.  If a ground
  water resource faces the risk of contamination, communities and others that rely on that
  water can expect, at some point, to incur costs associated with responding to contamination
  The expected value of these costs depends on:

        D     the cost of actions taken in response to contamination, which generally include
               remediating or treating the water, or in cases of severe contamination
               developing alternative. water supplies                              '

        D     the costs of damages that result from the contamination, such as losses  in
               agricultural crop production or increased industrial production costs (health
              damages are discussed separately below in the section on risk assessment)

        n    the likelihood  of contamination.

 An effective ground water protection program will significantly reduce the likelihood of
 contamination, thereby reducing the expected cost value of contamination response and
 damages  once a program is implemented. If the costs associated with responding to
 contamination can be avoided by implementing a ground water protection program,  the

                                     a —ble ^  S°me -"8-i - ^eloping
       It is important to note that the total avoided costs of a response program may not
 provide a basis for comparing the benefits of protection programs  Tins is becauTa
 protection program wiU often have several components, each designed to protect different
 areas from contamination threats that are specific to each area.  For example  it is noT
 ^ZkaSr0 T ^ TV* rfP°nding to a" tyiK* of contamination of a public well as
 toe baas for analyzing the benefits of a protection program component that is designed to
 control a single type of pollution (e.g., nitrate pollution).  The costs for response and
 protection should be broken down by contaminant and into comparable units, such as the cost
             gf °n' "J? Consumer-  Because contamination response cost estimates are
                                        °f ^^ -»— possible, they should be
Pn.ntv" ?C f!? S? COUnt?' NeW Y°rk Case Study presented at ** end of ** chapter, the
County estimated the cost of treating a specified number of wells for two classes of
contaminants in order to select the most cost-efficient treatment methods of both existing and
future contamination events. These estimates can be used to derive estimates of some of the
avoided cost benefits of Suffolk Country's proposed protection measures
                                                                                   77

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  6. Analyzing Costs and Benefits


        The estimation of avoided-cost benefits has three components:

        D     the cost of damages incurred if a contamination event
               was not noticed, or if action was not taken (the baseline
               costs)
                                                   Estimating
                                                   Avoided-Cost
                                                   Benefits
        D     the probability that the contamination would be detected and an effective
               response taken to prevent contamination before the ground water was used (the
               probability of the program working)

        D     the costs to detect,  respond, and comply with the program designed to address
               a contamination event (direct and indirect program  and compliance costs).

 These three components are represented in the following simplified equation for calculatine
 avoided-cost benefits:
                   (Baseline Costs x Probability of Program Working ) -
                   Direct and Indirect Program and Compliance Costs  ==
                                  Avoided-Cost Benefits
       The process of calculating avoided-cost benefits entails four steps. These should be
 repeated for each type of protection method being considered in a ground water protection
 program.

       Step 1: Calculate baseline costs.  As discussed in Chapter 3, the baseline represents
       the effects of doing nothing more than the existing program.  The types of costs that
       would  be incurred include:
              D
Treatment costs:  the costs to treat the types of contaminants
anticipated.  These costs should be estimated separately according to
the treatment methods used, which will depend on such factors as the
type of contaminant and the characteristics of the well (e.g., location,
size, volume of production, population serviced).
72

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                                                  6. Analyzing Costs and Benefits


         D    Replacement costs:  The costs to replace the volume of water that
               would be lost to consumption if a contamination event occurred  These
               costs would be based on the volumes of water consumed from wells in
               the area and the period of time that an alternative supply would be
               needed.

         D    Damage costs:  the value of the damages that would be experienced.

  It is important to remember not  to double count these costs.  Thus, during the same
  £?£'•  [ ^^t WatCr SUpply' ** oorts °f both «0*xma& and treatment should
  not be included in the estimate.  If the response to contamination is staged (e e
  replacement bottled water is provided until a treatment facility is in place) however
  both types of costs would be included for the periods in which they would be
  incurred.

  If possible, it is also helpful to assign to any given well or area probabilities that it
  will experience a contamination event, and preferably separate out the probabilities
 according to the types of sources and/or types of contaminants.  Otherwise  one
 assumes a "worst case" and a  100 percent probability of contamination occurring.

 Next, present and future costs  should be aggregated.  This can be done in one  of two
 ways.

        d    Calculate the present value of all future costs and add these costs to
              those one-time costs incurred during the present period (e.g., capital
              expenditures).

        D    If you want to compare programs on an annual  basis  and assuming that
              you estimate annual costs in "constant" dollars (i.e., taking inflation
              into account), you  can  amortize all one-time present costs and add these
              costs to your annual expenses (see the Suffolk County case study at the
              end of this chapter for  an example of amortization).

Last, you may elect to incorporate into the baseline calculation the probability that
contamination will occur. If you  do not, you are essentially assuming a 100 percent
probability of contamination, at least for the purpose of calculating the avoided costs
von          '               ?atucontamination * only, say, 75 percent likely, then
you will multiply the baseline by this possibility.  Note that this has the effect of
lowering the potential avoided costs, and hence the benefits, of a program   You may
                                                                              73

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  6.  Analyzing Costs and Benefits
        also elect to use a range of probabilities and use the results to derive a range of
        avoided-cost benefits.
        Step 2: Determine the probability that the program will work. This step involves
        estimating the likelihood that the proposed ground water protection program will
        detect and effectively respond to a contamination event and thus prevent
        contamination-related costs.  The effect of this probability on baseline costs, and thus,
      •  the coincident benefits of a program, may be dramatic. Therefore, you should be
        careful to base your probability estimates on available data to the greatest extent
        possible. For example,  maps showing  the location of public supply wells in relation
        to potential contamination sources, hydrogeologic studies, well samples, plans for
        residential and commercial development, etc. may assist you in making accurate
        probability estimates.

        In general, the more intensive the monitoring component of a program, the higher the
        probability of detection.  Because the likelihood of detecting contamination in the
        absence of monitoring cannot be predicted, a range of probabilities is useful.

        Next, you should estimate the probability of the program being effective. The most
        simple assumption is that the program will be 100 percent effective; however,  you
        may wish to use a range of probabilities.  Assuming that contamination occurs,
        multiplying these two probabilities will  yield  the overall probability that the program
        will both detect and effectively address  the contamination.  For example, suppose you
        assume that the probability of the detection is 90 percent and that the probability of
        the program  being effective ranges from 100 percent to 50 percent.  Therefore, the
        probability that the program will both detect and address a contamination incident will
        range from 90 to 45 percent.


       Step 3: Multiply the baseline costs by the probability that the program will work to
       yield the costs of contamination that could be avoided.  Note that if the probability of
       the program working was zero, the potential avoided costs will also be zero (that is,
       the program can have no benefit because it does not work).
74

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                                                          6.  Analyzing Costs and Benefits


         Step 4: Subtract the program costs from the potential cost of contamination to vield

         ^TdZVOided»°5t bgnefitS *the Pogrom* The hypothetical e^ple affte
         end of this chapter illustrates this process.


         landing upon the structure of the program or programs being considered, you may
         need to adjust your costs for events that are uncertain.  To illustrate this concept,    *
         consider the following^example. If a program's costs are certain to be incurred (e g
         monitoring wells will be installed, new  staff will be hired, new standards for
         businesses will be enacted), the full amount of these costs should be subtracted from
         *e total potential costs of contamination. However, if the cost elements of fprogSm
         are contingent upon other events (e.g., remediation will not occur unless

                                                to multiply""amount of
        Although estimating benefits using the avoided-cost method is
 fairly straightforward, it underestimates program benefits because it
 does not include the consumer surplus associated with avoiding
 increased costs for clean water and because it excludes the resource
 values associated with clean ground water.


        Despite these concerns, avoided costs are likely to be the most
 useful and accessible benefits  that are calculated for ground water protection programs

                                                                          PS"
The Uses and
Limitations of
the Avoided
Cost Method
    2  At first glance, the relationship between the local government expenditures in resoonse to
ground water contamination and the estimates of consumer well-being 1 norobv ous  To^Ms
relationsh.p, it is necessary to assume that ultimately, individuals pay for local goierLent
expendmires (e,ther directly through fees or indirectly through taxes or cha^gesTmHervices
^vemments provide). Increases in the price of water as a Suit of contamination will Save^o
effects on consumers: 1) their total expenditures on water would increase (by paying a Service
for fte quantitjrconsumed) and 2) their consumer surplus would decrease (mat is me difffrence

                                    •"what ^would be wimng L pay
                                                                                       75

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  6.  Analyzing Costs and Benefits
        Risk Assessment

        An important and complex subset of avoided costs is the benefit of avoiding increased
 illness or risk of cancer by protecting ground water from future contamination.  One of the
 primary motivations for protecting ground water is the protection of public health, which
 makes estimating the health benefits of different protection options very meaningful to policy
 makers and program managers.

       ' However, the number of assumptions needed to estimate the potential for illness or
 death in the absence of protection programs makes this benefit extremely difficult to
 estimate.  It should only be evaluated if it can be assumed that there is a probability that
 contamination would go undetected,  exposing the population to health risks.

        As with other types of economic analysis, the avoided costs of treatment and
 alternative supply should not be double counted with avoided health risks, unless health
 damages would be  incurred even  with detection.

        The issues to be addressed in using the results of a risk assessment to calculate the
 benefits of ground water protection include:

        D     what assumptions are made about the "value" of avoiding a cancer case or the
              number of cases  that result in "premature death" and

        D     how  to ascribe a value to avoiding non-cancer health risks.

       The approach to risk assessment suggested in this guidebook follows, in part, EPA's
 approach to conducting regulatory impact analyses of proposed drinking water regulations
 (see U.S. EPA Guidelines for Performing Regulatory Impact Analysis, December 1983
 (reprinted in  March 1991), particularly "Appendix A:  Analysis of Benefits," March 1988).
 The details about the process of health risk assessment, including the sources of information
 needed to conduct such an assessment, are presented in the text box on the next page.  The
 remainder of this section is limited to a discussion of how to monetize health benefits.
       In a regulatory impact analysis, the number of excess cancer
cases and the hazard ratio (the ratio of exposure to a substance to the
toxicity of the substance) that are derived from the risk assessment are
used to provide a range of estimates of the value of avoiding these
risks.  There is a standard way to value these effects:
Measuring
Health Costs
76

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                                                      6.  Analyzing Costs and Benefits
                                    Risk Assessment

         To measure the benefits of avoided health-related costs resulting from a ground
  water protection program, it would be ideal if a local government were in a position to
  develop detailed and precise estimates  of the risks of exposure to ground water
  contaminants.  If this is not possible, the steps outlined below indicate the types of
  ^formation that need to be compiled or the types of assumptions that must be made to
  develop, a range of possible health risks resulting from ground water contamination
  There are three basic stages in conducting a risk assessment of potential ground water
  contaminants.

        Step 1.  Assess the potential for exposure.  To determine exposure potential, the
 potentud sources of contamination, the physical characteristics of potential exposure sites
 potentially exposed populations, and  potential types of releases must be identified   Then'
 ground water transport calculations or models may be used to determine the potential   '
 concentrations of contaminants that a population may be exposed to from  different types
 Sr^i^r*1011 eV-entS;-  umally' ** P°tential intake of contaminants must be estimated
 for all of the ways in which drinking water might expose residents to contaminants.

        Step 2.  Determine the potential toxicity of contaminants.  After intake is
 estimated  the toxicity of contaminants must be determined. Because toxicity data are
 being updated continuously, the best source of information on the potential toxicity of
 fvTm 7^C°^nmanlS JS T ?PA data base called ^ Integrated Risk Information
 system (IRIS).  The purpose of this step is to determine at what dose a contaminant
 becomes a health threat, or for carcinogens, the dose-response relationship
fnr nnt ^ *' ^^ """^ °f Potential risks. After data on exposure and toxicity
for potential ground water contaminants have been gathered, the risk of adverse health
effects is characterized in terms of 1) the increase in the number of potential additional
cancer cases for carcinogens, and 2) a hazard quotient of exposure to harmful doses for
non-carcinogenic health effects.

       For more detailed information on conducting risk assessments, see U S EPA
Risk Assessment Guidance for Superjund, volume 1, December  1989 and  U S EPA '
Superjund Exposure Assessment Manual, 1988.
                                                                                    77

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  6. Analyzing Costs and Benefits


         D    Increased cancer risks.  In this case, a range of values of reducing risks to
               life is estimated and then applied  to the number of lives that would be saved if
               the cancer risks are avoided.  This range reflects methodological and other
               differences in studies estimating what society is willing to pay for small
               reductions in life-threatening risks.  This range is between $1.5 million and
               $8.5 million (constant 1986 dollars) per "statistical" life.3  For example, if the
               risk of death from exposure to ground water contaminants is 1 in 1 million,
               and the population of the community adopting protection measures is 2
               million, the protection measures (assuming they remove all probability of
               contamination) would result in 2 "statistical" lives saved,  for a benefit of
               between $3 million and $17 million.

         D     Increased non-cancer health risks.  Here, a value is estimated in terms of
               financial losses (medical costs and lost wages).  Estimating the value of non-
               fatal illnesses avoided is much more difficult because these costs will vary
               considerably for different types of contaminant-induced illness and for different
               individuals.  The hazard quotient derived from the risk assessment for non-
               cancer effects indicates whether a  population's exposure to a toxic contaminant
               exceeds the threshold level that results in some level of health impact.  In
               other words, if the hazard quotient is over 1, the exposure is over the
               minimum exposure that results in  some type of health impact. This quotient
               only indicates the minimum contaminant dosage required for some type of
               health effect; other health effects may manifest at higher dosages.  If the
               hazard quotient is greater than  1, the population is at risk for some negative
               health impact.

               The procedure for determining exactly what illnesses are likely to develop is
               called  segregation of hazard indices. It is used to ascertain the mechanism  for
               the contaminant's action on  the human body.  This analysis generally requires
               a trained lexicologist to determine  the types of illnesses that are likely to result
               from potential exposures.  Once this is determined,  the costs of treating
               specified illnesses can be used, in conjunction with estimates of lost wages and
              length  of illness,  to determine the potential economic impact of exposure to
              ground water contaminants.
    3  Fisher, Ann, "The Value of Reducing Risks of Death: A Note on New Evidence " Journal of
Policy Analysis and Management, vol. 8, no. 1, Winter 1989, pp. 88-100.
78

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                                                        6.  Analyzing Costs and Benefits


         Because of the large number of assumptions involved in a health risk assessment it is
  best to estimate a range of possible exposures.  The range of values associated with health
  risks should then be applied to each possible level of exposure
       For non-fatal health impacts, the calculation of potential
medical expenditures and foregone earnings gives a lower-bound
estimate in determining the benefits of avoiding exposure to health-
threatening contaminants.  It estimates the expenses that individuals
would incur, but does not take into account changes in their overall
welfare (e.g., individuals may feel sick but not spend money on
treatment).
                                                                       The Uses and
                                                                       Limitations of
                                                                       Risk
                                                                       Assessment
 nf .ron          di/fi^ulty' *» is m important approach to estimating the costs and benefits
 of ground water protection programs.  Combined with the avoided costs of treatment
 alternative supply, and non-health damages, this approach will provide a measure of benefits
                  "gram's beneflts' "•"* * would exclude
        Contingent Valuation4
 ~ri«.  ?**** e(Tonomticianalysis technique estimates a good's full benefits to individuals by
 estimating their total demand for that good.  For most commodities, demand can be
 estimated from data on the amounts of a commodity that are purchased at different prices
 Ground water, however, does not have a price if it is obtained from private wells, and may
 not be pnoed at "market price" if it is obtained from public wells.  It is thus called a no™
 market good.  For this reason, the data available on the volumes of ground water consumed
 at different prices will not be sufficient to derive a demand curve for ground water and
 without a demand curve, it is not possible to estimate changes in consumer surplus
 Similarly, there are no data at all on how people value the resource benefits (option, bequest
 and existence values) of ground water because there is no market for these benefits.        '

       The contingent valuation method is used to estimate the demand for non-market goods
 by determmmg the amount oC money people would be willing to pay for different quantities
 of those goods.  In essence, it creates a hypothetical market (a sort of "what if situation)
Hi     ,                   S * major contingent valuation study in support of RCRA's Corrective Action
Rule. Interested persons should contact the Office of Solid Waste for further information.
                                                                                    79

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  6.  Analyzing Costs and Benefits


  and asks individuals to place a value on the good in this market.  This willingness to pay is
  obtained through in-person, telephone, or mail surveys that are carefully structured to 1)
  present a scenario establishing a hypothetical market in which the good can be bought, in
  terms that the respondent is comfortable with, 2) accurately elicit the respondent's
  willingness to pay for the good, 3) reveal the characteristics of the respMident that are likely
  to influence the value placed on the good in question, and 4)  avoid biasing the responses.

        Contingent valuation is the officially approved method for valuing non-market goods
  by the U.S. Water Resources  Council and for valuing natural resources under the
  Department of Interior's CERCLA regulations.5  This method is also approved by the U.S.
  Environmental Protection Agency, the U.S. Forest Service, and the U.S. Army Corps of
  Engineers. However, this is a very detailed and costly method  to undertake in evaluating
  benefits.

        EPA's Office of Policy, Planning and Evaluation has recently completed a major
 study exploring the use of the contingent valuation method for valuing ground water.  This
 study, entitled Methods for Measuring Non-Use Values:  A Contingent Valuation Study of
 Groundwater Cleanup, discusses methodological issues in measuring non-use values for
 ground water cleanup.  The  study also determined that citizens will pay an average of $7 per
 person per month for non-use values of ground water. This is a significant amount when
 added over a city or state.
        Contingent valuation surveys require careful attention to two
 factors: the survey questionnaire and the sample population that is
 selected for surveying.
Measuring
Willingness
to Pay
       The Survey.  The first step in a contingent valuation study of ground water protection
is to determine what attributes of ground water need to be characterized in order to elicit
people's willingness to pay for it.  In developing the survey, it is essential to develop a
detailed scenario explaining:
    5  U.S. Water Resources Council, Economic and Environmental Principles for Water and Related
Land Resource Implementation Studies, Washington, DC: U.S. GPO, 1983; and U.S. Department of
the Interior, "The Final Rule for Natural Resource Damage Assessments Under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980," Federal Register, vol. 50, no.
245, 198o.
80

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                                                        6.  Analyzing Costs and Benefits


         D     the characteristics of the ground water (e.g., healthfulness, uses)

         D     the baseline level at which the ground water is being provided (e.g., the
               volume of ground water currently being pumped)

         D     the changes in the amount of ground water provided or its characteristics under
               different protection options.

 Then, individuals are asked to determine the amount they would be willing to pay to avoid a
 decrease in quality or quantity, or to improve current levels. The scenario must also include
 a realistic method of payment (e.g., tax increases or user fees) and a description of anv
 available substitutes (e.g., other water sources).

        In conducting the survey, there are several different ways to approach asking people
 to provide a value.  The basic options are:                                      BF^^C

        D    A single-value question, either open-ended (e.g., how much would you be
              willing  to pay for	7) or a take-it-or-leave it value (would you pay $	
              for	?)-  T*16 Dover, New Hampshire case study at the end of this chapter
              used a take-it-or-leave-it question:  "Would you  be willing to pay $	per
              year in  extra property taxes  for such a ground water protection plan  in
              Dover"? This method requires a large survey population to ensure meaningful
              results.                                                               *
       results.

D
              Iterative questions (are you willing to pay $	for ? If not, would you pay
              $	less?)-  One type of iterative approach is a bidding game.  Here
              respondents are asked if they will pay a certain price for clean ground water
              and the price is raised if they answer yes or lowered if they answer no until
              their equilibrium price is reached.  An alternative to the bidding game is a
              single-question payment card, which provides a range of optional prices
              (including any value in between).  As an aid to the respondent, it  may provide
              examples of the amount that is spent on non-related public goods such as road
              repairs.

The survey may also try to assist people in the difficult task of putting dollar values on
something they do not  usually think of in those terms, either by providing visual aids or bv
specifying a range of values from which to choose.

       The contingent valuation method assumes that the hypothetical market can be
described in such a way that the respondents will react in the same way as they would in a
                                                                                    81

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  6.  Analyzing Costs and Benefits


  real market.  This helps to encourage realistic and valid responses and to avoid potential bias
  (where the sample wiUingness-to-pay estimates will systematically diverge from the
  respondents' "true"  willingness to pay).  Most bias can be alleviated or eliminated with
  careful survey design.  Six potential sources of bias pertain to contingent valuation surveys:

         D    hypothetical bias:  the respondents cannot or will not treat the hypothetical
               market as they would a real situation

         D    strategic bias: the perceived consequences  of the experiment influence the
               respondents' stated values

         D    permanent vehicle bias: where the method  of payment used in a survey elicits
               emotional or protest responses from the participants (e.g., people who do not
               want to see their taxes raised give a $0 value to their water)

        D     starting point bias:  in a bidding approach,  where the starting bid implies a
               value  for the good that influences the price  ultimately chosen (e.g., if an
               individual reconsiders his or her valuation of a good because it seems too
               extreme relative to the starting bid)

        D     information bias:  the respondents are influenced by the amount and detail of
               information given to them

        D     interviewer bias:  interviewers consciously or unconsciously influence
              respondents' decisions or valuations.


        The Sample.  Contingent valuation surveys are  costly and their samples must be large
 enough to obtain meaningful data.  A sample that is too small will result in statistically
 biased values for the average  willingness to pay.  Some of the contingent valuation methods
 used to gam unbiased estimates demand a very large sample size, such as the take-it-or-leave-
 it-type surveys, because each  individual is giving only  one  value that may  or may not reflect
 their highest value.  If the sample is large enough, the highest and lowest: acceptable values
 can be determined over the entire sample.  In general,  contingent valuation studies need more
 respondents than most types of survey research because there is a greater potential for people
 to refuse to participate (the questions require much effort on the respondent's part to go
 through a very unfamiliar exercise) and because a large difference between willingness-to-pay
values is expected.  Sample sizes of 600 to 1,500 completed, useable surveys are
82

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                                                         6.  Analyzing Costs and Benefits


  recommended, although a sample size this large is not common in contingent valuation
  SurVCVS.
         The sample must also be representative of the characteristics of the general
  ^nTT^t ^"Tu** S ^^ iS rePresentative> the people to be interviewed must be
  randomly selected and then evaluated statistically to see if they reflect the overall population
  If the evaluation reveals that the sample of respondents is not representative, the rS o °
  the willingness-to-pay questions must be weighted statistically to reflect the overall
   oulation.
 population.

       Aggregate Willingness to Pay.  After the survey is conducted and the willingness-to-
 pay responses are weighted to reflect the characteristics of the larger popufcti™  foe
  flVCr&Pfi 11/11 iltlOnACC &f\ TlQXf" /ai+liA  „.       	J*  \ **   •               v*^'*»j Viiw
    •    .              * j  \iwi.ui&i. iiiwuji UJT mcQiaJi/ Tor oUrOTGrit &r*ounci W3.tsi* fv*ttrtti
 miSS -SSf? f ^ ,fr°m the JU1Vey reSUltS'  The averaSe ^dividual response is then
 multiplied by the total population to derive the aggregate willingness to pay for the good

.—BK^"^^
 curve of aggregate social willingness to pay for protecting ground waterTesourSs


       If it is feasible to use contingent valuation to estimate the
benefits of a proposed ground water protection program, this method
will provide the most thorough estimate of the program's total
economic benefits.  Two considerations must be taken into account
with this method, however.  1) Great care must be taken in designing
a contingent valuation study or an incorrect specification of what is
being valued will render  the results essentially meaningless. 2) It is
VCrV difficult to liw» tfiic matV>^^ :«	:	M.-	   -.,       ..   .
                                                                       The Uses and
                                                                       Limitations of
                                                                       Contingent
                                                                       Valuation
         icult to use this method in conjunction with any other household benefit estimation
         because of the potential for double counting. Because contingent valuation is most
 hkely to measure the total willingness to pay for the attributes of ground wate^uantity and
 quahty), measuring the benefits related to any of the individual attributes used in the
 contingent valuation scenario may result in double counting benefits.  One of the primary

 Sf Snncre^* °* aSS6SSment:  ** value used.in ^mating the benefit!fi£?
 »v,-t  u*  •  j ^     .              neaitn nsks is a total willingness-to-pay measure iust like
 that obtained through contingent valuation. It would be difficult to design a scenario for a
 contingent valuation survey that did not include health risks as part of the ch^efin ground



    6  Mitchell, R.C.  and R.T. Carson, Using Surveys to Value Public Goods, Washington DC-
Resources For the Future, 1989, p. 228. Additional survey references are noled £ thetibiiog^aphy.
                                                                                     83

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   6.  Analyzing Costs and Benefits


   water attributes.  Thus, the avoidance of these risks would be double counted if both methods
   were used.  In general, if a contingent valuation approach is used to value the benefits of a
   ground water protection program, the survey should elicit all of the relevant values people
  place on ground water; no other benefit estimate should be used for benefits derived from
  drinking water commodity use and resource values.  Avoided cost estimates of benefits to
  businesses, however, would not be double counted under estimates derived from a contingent
  valuation study.                                                                    B


         Hedonic Pricing

         Whether a household gets its water from a private well or a public drinking water
  system, it is unusual for the water to be priced at levels that reflect its cost of production or
  its commodity value.  Usually, water is either free or a nominal fee is charged.  One way to
  try to determine the demand for water (how much  people are willing to pay for different
  amounts) when there is no real market is to look at the market for another good (such as
  housing values) whose price is affected by the quality of water.  In this kind of indirect
  approach, the effect of different levels of water quality on housing prices can indicate the
  value placed on the quality of ground water itself.

        Hedonic pricing is a method that uses property values to determine other values  (for
  example,  the difference in price between two "identical" houses located one mile and ten
  miles, respectively, from a park is a partial measure of the value of the park).  Housing is
  traded in a well-defined market, and the price of a house is defined largely in terms of
 relative attributes offered by different types of houses within the same market.  This method
 estimates the implicit price of each attribute associated with housing prices.  Among the
 attributes  that affect the price of housing (e.g., the number of rooms or the proximity to
 public transportation), environmental quality (specifically air quality) has been shown to be a
 relevant factor.7

       Although hedonic pricing models have been applied to estimate the change in property
 values associated with proximity to things that might have an effect on ground water quality
      For example, see Freeman, A.M. HI, The Benefits of Environmental Improvement: Theory and
 Practice, Baltimore: Johns Hopkins Press for RFF, 1979, pp. 152-162, and Brookshire D S  R C
 d Arge, W.D. Schulze, and M.A. Thayer, "Experiments in Valuing Nonmarket Goods:  A Case
 Study of Alternative Benefit Measures of Air Pollution Control in the South Cost Air Basin," Methods
for Assessing Air Pollution Control Benefits, vol. 2, Washington, DC:  U.S.  EPA, 1979.
84

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                                                        6. Analyzing Costs and Benefits


(i.e., a hazardous waste site),8 this technique has not been applied exclusively to ground
water quality to date.  Although academic researchers may be interested in applying this
method to ground water, several methodological questions need to be resolved to be sure that
the study correctly values ground water protection efforts. Because hedonic pricing has not
yet been adapted for use in estimating the benefits of ground water protection efforts it is
not covered in detail in this guidebook. The references section lists a number of studies on
hedonic pricing.
                 R' 2?°%* md V' Kefry Smith' "Market Segmentation and Valuing Amenities
                            °f Hazard°US Waste Sites'" Joumal * Urban Economics, vol. 28,
                                                                                     55

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  6. Analyzing Costs and Benefits
  Hypothetical Example:  Assessing Costs and Benefits
   ___                                                         	              !••  ..-
   To estimate the avoided-cost benefits of the two ground water protection program options
   being considered in Fairhomes County, the program manager begins with the baseline
   calculated in Chapter 3.

   The total estimated one-time costs are $78,350,000. Amortizing over a 30-year period at
   a 10% rate of interest yields annual costs of approximately $8,300,000. Adding these
   amortized costs to the estimated annual costs of $2,345,000 yields total baseline costs of
   $10,645,000.

   The program manager assumes a worst-case scenario and estimates that the likelihood of
   such a contamination event occurring is 100%.  Therefore, the total potential avoided
   costs are $10,645,000.

   Next,  the program manager estimates the probability that the two programs will each
   detect and effectively address the ground water  contamination. Because Program #1
   places a greater emphasis on monitoring, the program manager assumes a 100%
   probability of detection, while Program #2 only receives an 80% probability of detection
   For simplicity, both programs are assumed to be 100%  effective.

   Multiplying these probabilities by $10,645,000 yields the following potential costs that
   could be avoided:

         Program #1  $10,645,000 x (1)(1)    =  $10,645,000
         Program #2  $10,645,500 x (.8)(1)   =  $8,516,000

  Next, the program manager subtracts the direct and indirect costs of the two programs
  (from Chapter 4), which in  this case are assumed to be certain to be incurred,  to derive
  the total avoided-cost benefits:

         Program#l  $10,645,000 - $5,595,000   =  $5,050,000/year
         Program #2  $8,516,000 - $3,040,000   =   $5,476,000/year
  Thus, the annual avoided-cost benefits of Program #2, are higher.
86

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                                                     6. Analyzing Costs and Benefits
Case Study:
Suffolk County, New York
                                                                    Example of
                                                                    Estimating
                                                                    Avoided Costs
 The 885 square miles that make up Suffolk County contain 10 towns
 29 villages, and 73 school districts.  The County has eight
 hydrogeologic zones and seven water management areas that are based
 on geographic considerations.

        The County's ground water reservoir holds over 70 trillion gallons of water and is
 composed of three vertically layered aquifers.  There are about 561 public supply wells in
 the County: 318 in its glacial aquifer, 238 in its Magothy aquifer, and 5 in its Lloyd
 aquifer.  In addition, an  estimated 77,800 private wells serve 1.3 million County year-round
 and seasonal residents (1980 Census).  Sixty-five percent of its water is provided for
 residential use, 21 percent for commercial/industrial uses, and 7 percent for agricultural uses.

        Most of the County's ground-water contamination affects the uppermost aquifer
 although some wells in the deepest aquifer are also contaminated.  The principal source's of
 ground water contamination in the County are organic solvents from consumer products and
 commercial/industrial facilities, pesticides from currently prohibited agricultural practices
 and nitrates from cesspools and fertilizers. Nearly 1,000 private wells and 25 public supply
 wells have been found to exceed organic contamination limits, while 4 public and over 2 700
 private wells have exceeded pesticide contamination limits.

       Suffolk County has  experienced substantial residential, commercial, and industrial
 growth since the mid-1960s, which is projected to continue over the next 40 years
 Consequently  ground water quality management has been a predominant environmental
 concern  Before developing a Comprehensive Water Management Plan in 1987, the Suffolk
 County Sanitary Code already contained several new provisions for the protection of ground
 water resources addressing  water supply (Article 4), realty subdivision (Article 6) water
 pollution (Article 7), and hazardous materials storage (Article 12).


       Extent of Ground Water Contamination

       As of 1987, contamination by synthetic organic chemicals was the greatest overall
threat to the County's water supply.  This contamination originated from a number of
residential and industrial sources, but the principal chemicals were halocarbons (from
solvents and degreasers) and aromatic hydrocarbons (from fuel components). Future organic
                                                                                 87

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  6.  Analyzing Costs and Benefits


  chemicals contamination in new industrial and residential developments was addressed by
  instituting new controls in the Suffolk County Sanitary Code.

        About 30 percent of the private wells in County farming areas showed signs of
  pesticide contamination. The major pesticides found in the ground water were no longer
  used, but remnants of them were carried by natural vertical flow into deeper portions of the
  aquifer.  The County felt that stricter federal and state regulations might be needed for the
  adequate protection of supplies from.other agricultural pesticides in the fanning regions.
        Nitrate contamination was also widespread, with the principal sources being lawn
  fertilizers and on-site commercial and residential wastewater disposal sites. More than one
  sample with marginal or poor water quality due to nitrate contamination was  found in 22
  percent of the County's public wells.

        The Comprehensive Water Resources Management Plan, as summarized below,
  recommended a combination of regulatory measures  and public education efforts to reduce
  significantly the threat of nitrates and other sources of ground water contamination.


        Comprehensive Water Resources Management Plan

        Suffolk County P1^1"**1 its Comprehensive Water Resources  Management Plan in
 1987.  Its objective was to ensure County residents of an adequate and safe water suoolv
 through the year 2020.  The Plan examined:

        D     Structural program options to address existing ground water contamination
              (e.g., the construction of new water supply systems and treatment facilities for
              contaminated  water).

        D     A non-structural ground water protection program to prevent further
              contamination. The program's more than dozen components included planning
              functions, regulatory controls, land acquisitions, and taxation.

       A cost-benefit  analysis of the ground water protection program provided a valuable
overview of its merits. The cost to the County of each program component was estimated
individually and reported in the  Plan. The County did not, however, evaluate the benefits of
the program or compare them to its costs.  Therefore, for the purposes of developing  this
case study, benefits were estimated in terms of the avoided costs of treating contaminated
wells in the future if the program was not implemented.  Avoided costs were based on data
developed for the County's management plan for contaminated ground water.
88

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                                                      6. Analyzing Costs and Benefits


        Protection Program  Costs

        Although it was not specified in the Plan, it appears that cost estimates for most
 components were derived using a modified comparative accounting technique.  For example
 the County s cost estimates were often a function of the number of additional professionals '
 necessary (and the  salaries those positions would demand) or the anticipated rate at which
 various program components could be subcontracted.  The modeling approach was also
 applied in circumstances where capital expenditures would be necessary for the
 implementation of a component. The primary components encompassed in the County's non-
 structural ground water protection program included:

        D    monitoring and enforcement activities
        D    wastewater collection planning
        D    chemical spill response and compensation
        D    pesticide, stream  corridor recharge, and saltwater interface investigations
        U    public information programs
        CD    wellhead protection
        D    toxic household waste disposal control
        D    water conservation
        ID    industrial property transfer approval.
 ti  <«n ™ t0tal aniT1 oPf^g «»* of t^86 Program components were estimated at about
 M,J50,000 a year.  In addition, it was estimated that Suffolk County would incur a one-time
 m^T !J  I-'5 miUkM; from 
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  6. Analyzing Costs and Benefits


  Estimated Annual Treatment Costs (in 1985 dollars)
Treatment Technology
Production Rate
Capital Costs
Annual Operating Costs
Total Annual Treatment Costs*
Aeration
0.1 mgd
$92,000
$4,300
$16,000
3.0 mgd
$540,000
$63,000
$130,000
Granular Activated Carbon
0.1 mgd
$150,000
$40,000
$60,000
3.0 mgd
$950,000
$360,000
$480,000
  * Based on amortization of capital costs over 20 years at 12 percent interest (annualization
  factor = .13) plus annual operating costs.


        Based upon the County's estimates and depending upon the "size" of the well  the
  lower bound for the value of ground water ranged from about $15,000 per well per year for
  small" wells to nearly $500,000 per well per year for "large" wells. Note that these
  treatment cost estimates were based on only two classes of contaminants (VOCs and
 pesticides). These cost estimates, and hence the measure of the value of ground water could
 have been quite different if it had been possible to obtain data for other types of
 contaminants.

       Alternative Supply Costs.  Suffolk County also estimated that it would cost over $43
 million (in 1985  dollars) to construct transmission and distribution water main extensions to
 service the 68 communities that had contaminated wells.  However, the  County did not
 include additional costs for the construction and distribution of water mains in six regions
 Therefore, it is not possible to calculate the full avoided costs of obtaining alternative
 supplies for these communities.


       Comparison of Costs and Benefits

       Suffolk County did not actually compare the value of clean ground water (i.e., the
 benefits) to the costs of its proposed ground water protection program. However, it is
 possible to use the results from the avoided-cost calculation above, together with data from
 the Water Resources Management Plan,  to make such a comparison.

       A comparison of the costs per well of the protection program  and the estimated
 avoided treatment costs reveals  that the value of ground water may exceed the costs of the
protection program by  an amount ranging from approximately $470,000  per well per year to
90

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                                                     6.  Analyzing Costs and Benefits
slightly less than $13,000 per well per year.  This range assumes, however, that the program
will be 100 percent successful in preventing ground water contamination.  If the program did
not prevent all contamination, the difference between the value of ground water and the costs
would decrease substantially.
Case Study:
Dover, New Hampshire
                                                                    Example of
                                                                    Using Surveys
 The water supplies for Dover are pumped directly from ground water
 resources stored in aquifers.  In 1988, many of Dover's neighboring
 towns experienced ground water contamination problems caused
 primarily by the leaching of chemicals and toxic wastes from
 underground storage tanks.  Although Dover itself had not experienced
 any serious ground water pollution problems, despite two wells closed  for benzene
 contamination, the town decided to take proactive measures and draft a ground water
 protection ordinance.


       1988 Ground Water Protection  Ordinance

       Hazardous wastes, pesticides, development, and urban runoff posed the major threat
 to Dover's ground water resources.  The objective of the 1988 ordinance was "to promote
 public health, safety, and general welfare by protecting and preserving  the quality of existing
 and future ground water supplies from adverse or detrimental land use, development  or
 activities."                                                                  '

       The ordinance required the identification of important and sensitive recharge areas
 and the re-zoning of activities in these areas. Zones were delineated by three circular layers
 (primary,  secondary, and tertiary) around wellhead areas. In the primary zone, development
is not allowed.  In  the secondary zone, pesticide application and the storage of hazardous
waste are illegal.  In the tertiary (recharge) zone, development densities of greater than  20
percent coverage are prohibited.  These  zoning laws formed the backbone of Dover's ground
water protection program.
                                                                                 91

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  6.  Analyzing Costs and Benefits


        Dover considered many alternative land strategies employed in similar New England
  towns, including public acquisition or land overlying sensitive recharge areas. They decided
  upon zoning as the best means of meeting their specific needs and cost constraints.
        Costs


 person
        The annual operating costs of Dover's zoning ordinance have been minimal: only one
 ,____.. is responsible for responding to complaints in this area, which is a small part of his
 daily routine.  The real cost of the program has been hydrogeologic surveys of the basins,
 the identification of recharge areas, zone delineation, and administrative procedures.  Since
 1988, the town and the EPA have spent an estimated $250,000 on these activities (for an
 average cost of $80,000 per year over a three-year period).  These were one-time costs
 needed to design the ground water protection program.


       Benefits

       As the Dover Planning Council was developing its zoning ordinance, two independent
 researchers from the University of New Hampshire (Steven Schultz and Bruce Lindsay) were
 performing an independent analysis to determine the  value of ground water protection to the
 residents of Dover.9 They felt this information would assist public officials and policy
 makers in assessing the political and economic viability of specific ground  water protection
 plans. Although there is no indication that their study influenced the policies adopted by the
 Council, valuable information can be extrapolated from their method of estimation (the
 contingent valuation survey).

       Under this methodology, a simulated market is created in which the "quantity" is
 represented by the provision of ground water protection services and the "price" is
 represented by the residents'  willingness to pay for a change (i.e., an increase) in the
 provision of these services.  The mechanism for creating this "market" is a survey in which
 respondents are asked how much more in property taxes they are willing to bear to  enact a
 ground water protection program.

       Schultz and Lindsay wanted to determine how much Dover residents were willing to
pay for ground water protection programs.  They employed a dichotomoiiis choice contingent
   9 Schultz, Steven D. and Bruce E. Lindsay, "The Willingness to Pay for Groundwater
Protection," Water Resources Research, vol. 26, ho. 9, 1990, pp. 1869-1875.

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                                                       6.  Analyzing Costs and Benefits




                        determine resident's willingness to pay (WTP) for ground water




  esteblin    ?°nductedK1a pre-test survey with a* open-ended valuation question to
  establish a range of reasonable responses. The results of this survey indicated that the

  SoTroT!rWOUldbelm  «*• ** -a* * contingent JLJS^t«?S»
  Dover property owners. The survey described a possible protection program of acquisitions
  zoning ordinances, hiring personnel, and other strategies. It then asked:        ac3msitlons>



        Would you be willing to pay $_ per year in extra property taxes for such a

        groundwater protection plan in Dover?
 ^         SUrVCy distributed to a household had a specific dollar amount included in the
 above question, ranging from $1 to $500 in $25 increments. The survey al o included

            0"*? SOci°eCOnomic Characteristics of the respondents.  So"wS were


                              " «"' "•                                  8

 for -o^
                                   .                     '                    wee
                 the maximum and minimum WTP of property owners.  They decided to

        1median1^stima1?s of *e respondents' WTP instead of mean estimates to eSurffta
 the results would not be statistically affected by outlier (very high/low) values  All of Ae

 non-respondents to the survey were assigned a WTP value of ze^o, a ^conservative

 assumption.  From the survey responses, they were also able to determine what
                                             s
WTP value of zero. After multiplying the median WTP value of $40 bv the numb
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  6. Analyzing Costs and Benefits


         D     median values for WTP were used instead of mean values
         D     non-respondents were not assumed to value ground water protection in the
               same way respondents did in the survey
         n     only property owners (not renters) were surveyed.

  If the non-respondents were assumed to place the same value on ground water protection as
  did respondents, the median value would increase, and the annual WTP value for Dover
  would be $199,200 ($67.80 x 2,938). Furthermore, if the mean WTP estimate was used to
  calculate WTP, this amount would increase approximately six-fold, to $642,420.  In
  addition, these values do not account for the rental population of Dover, which relies  on
  these same ground water resources.
        Costs Versus Benefits

        The design and implementation cost of the zoning ordinance for ground water
 protection in Dover averaged just over $80,000 per year over a three-year period.  These
 were one-time costs, supplemented by continuing minimal operating costs. Under Schultz
 and Lindsay's most conservative assumptions, the residents of Dover were willing to pay
 $117,520 a year for a ground water protection program.  In fact, their estimates indicated
 that residents' WTP for ground water protection could reach almost $200,000 a year, based
 on the assumption that survey non-respondents had the same average WTP as respondents.

       A comparison of the actual costs of the ordinance with the Schultz and Lindsay
 survey results reveals two important conclusions. First, the benefits of a ground water
 program, as represented in terms of residents' WTP, exceeded the costs significantly thus
 indicating that the program was worthwhile.  Second, the study results indicate that if Dover
 needs to undertake additional protection measures in the future, the benefits appear to justify
 the additional expenditures.  Because the survey payment vehicle was a lax, policy makers
 should expect that residents will support higher taxes to meet these needs if they arise.


       Other Considerations

       The estimated $80,000 annual cost incorporated only program costs. The estimation
 and inclusion of the compliance costs associated with the zoning ordinance would have
 reduced the benefit-cost margin, or the net benefits.  Compliance costs  might have been
 assessed by estimating the decreased value of the zoned areas due to restrictions on
 development and pesticide use.
94

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                                                                        Glossary
 Avoided cost benefits
 Avoided health-
 related cost benefits

 Commodity benefits
 Comparative accounting
 cost estimation
Compliance costs


Consumer surplus



Contingent valuation
 The benefits of not incurring costs that would have to be paid in
 the absence of a ground water protection program (e.g.,
 remediation and alternative supply costs).

 The value of lives saved and non-fatal illness avoided due to
 a ground water protection program.

 The benefits resulting from the use of ground water as a
 commodity, such as for drinking water, agricultural uses  and
 industrial applications. These benefits will depend on the
 quality and volume of ground water, and they frequently can be
 estimated using market prices for ground water or goods and
 services produced.

 A cost estimation technique that involves breaking a new
 program into its constituent activities and assigning a cost to
 each activity based on experience with other types of programs.

 The costs that arise as a result of public and private activities to
 comply with ground water protection requirements.

The difference between what consumers actually pay and what
they would be willing  to pay for additional units of a good or
service.

A survey method for measuring the total willingness to pay for
the various attributes of ground water.
                                                                                  95

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                                                                                Glossary
  Deadweight loss
  Direct costs


  Discounting
 Existence value



 Expected costs


 Hazard quotient



 Hedonic pricing



 Hydraulic conductivity



 Implementation costs
 The term for a decrease in economic well-being that results
 when costs or production increase (i.e., the supply curve shifts
 up). Deadweight loss results from decreased demand due to
 increased prices, and is not captured by estimates of consumer
 surplus.

 The costs paid by entities that are directly affected by a program
 or policy.

 The process of adjusting for the time value of money.  If a cost
 or benefit is realized today, its dollar value is higher than if it is
 realized at some point in the future. The factor used to make
 this adjustment is the discount rate, which is applied to future
 costs or benefits to translate them into present-value terms.

 The benefit of knowing that a ground water resource is
 uncontaminated, even if there is no expectation that it will be
 used.

 The cost of an event multiplied by the  likelihood of the event
 occurring.

 The ratio of exposure to a substance to the toxicity of the
 substance, indicting the maximum dosage required for the
 substance to result in some type of health effect.

 A benefit estimation technique that uses property values to
 determine the value of one attribute of  property, such as ground
 water quality.

 The rate at which a fluid can move through a permeable
 medium.  It is a function of both the medium and  of the fluid
 flowing through it.

 The costs of designing, building, and operating a ground water
protection program for the public  sector.
96

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                                                                                Glossary
  Indirect costs
  Marginal costs
  Maximum contaminant
  level (MCL)
 Modeling or engineering
 cost estimation
 Net benefits
 Opportunity cost
 Option value
Primary costs
Resource benefits
  The costs passed on to others by those initially responsible for
  payment, such as higher utility fees for customers or lost tax
  revenues for the government.

  The cost of producing each additional unit of output. This is the
  same as the supply curve for a firm or an industry.

  A numeric criterion established under the Safe Drinking
  Water Act that sets a ceiling on the permitted concentration of
  contaminants in drinking water.  MCLs are set at the level at
  which no known or anticipated health effects occur and that
  allows an adequate margin of safety.

 A cost estimation technique that uses standard cost
 curves and unit cost data derived from engineering text to
 determine program costs.

 The total discounted benefits of a ground water protection
 program minus the total discounted costs.

 The value of the next-best use for a resource (such as labor or
 other inputs), usually measured by the market price of the
 resource. More generally, the opportunity cost of an activity is
 the value of any foregone alternative.

 The benefit of being able to use a ground water resource at
 some time in the future.  This benefit includes use by future
 generations, sometimes termed "bequest" value.

 The costs associated with changes in a firm's operation or in
 government programs that result in changes in the goods and
 services used or produced.

This term incorporates both option, bequest, and existence
values, which are not priced by the market.
                                                                                    97

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                                                                                Glossary
  Secondary costs
  Statistical life
  Survey value cost
  estimation
 Wellhead protection
 Willingness to pay
 Ripple effects in the economy that result from changes in the
 demand for goods and services due to the implementation of a
 ground water protection program and compliance with it.

 An estimate of the number of deaths that might result from
 exposure to a carcinogen, calculated by multiplying the
 community population by the number of excess cancer deaths
 per unit of population (usually 100,000),  and dividing by the
 unit of population (i.e., 100,000).  This estimate does not reflect
 any projection of individual deaths.

 Gathering relevant cost data from ground water protection
 program managers, private entities, and others to determine the
 total costs of a program.

 Protecting the surface and subsurface area surrounding a  water
 well or wellfield, which either recharges or influences the well
 or wellfield.

A measure of the maximum amount that an individual is willing
to pay for each unit of a good or service,  as measured by the
area under the demand curve for the good or service.
98

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                                                             Bibliography
  General References


  S^™?* ^undatio°-  &°™™c Implications of Groundwater Contamination to Companies
  and Cities.  Navarre, Minnesota:  Freshwater Foundation, 1989, 80 pages.       ""P™**
 Kfeh!?' A  ;^McinS i™* Trust ^sources of Mono Lake and Los Angeles' Water

                             "                         VOL 23' no  8  1987 PP.

 Northwest Michigan Regional Planning and Development Commission.

 ZSS5 to7?J*rcM'?**'' to"™1* •"' Socfa' *>«• S Stra"Syfor the 1990'*. 1991.
                                                                            99

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                                                                        Bibliography
  U.S. EPA.  Wellhead Protection Programs:  Tools for Local Governments.  EPA 440/6-
  89/002.  1989. A thorough guide to ground water protection program options.

  U.S. Water Resources Council.  Economic and Environmental Principles for Water and
  Related Land Resource Implementation Studies.  Washington, DC:  U.S. GPO, 1983.

  Walker, D.R. and J.P. Hoehn. "Economic Damages of Groundwater Contamination in
  Small Rural Communities: An Application to Nitrates." North Central Journal of
  Agricultural Economics, vol. 12, no. 1, January 1990, pp.  47-56.


  References for Chapter 4: Assessing the Costs

  National Water Well Association. Water Well Drilling Cost Survey.  Columbus, Ohio
  December 1979.  This reference gives cost data for estimating the costs of alternative water
  supplies.

 R.S. Means Co., Inc.  Means Average Construction Cost Data.  Kingston, Massachusetts
  1989 (annual). A standard reference for cost data needed for cost estimation;

 U.S. EPA.  EPA Guidebook: Remedial Action at Waste Disposal Sites (Revised).
 EPA/625/6-85/006. 1985.  Reference for the costs of remediating ground water
 contamination; its data require adjustment to reflect current prices.

 U.S. EPA.  Superfund Exposure Assessment Manual  EPA/540/1-88/001.  1988  Presents
 methods for the quantitative analysis of ground water contamination, including a discussion
 of alternative models available for predicting the transport of contaminants in ground water.


 References for Chapter 5:  Analyzing Cost Effectiveness

 Krutma, J.V. and A.C. Fisher. The Economics of Natural Environments: Studies in the
 Valuation of Commodity and Amenity Resources.  Washington, DC:  Resources For the
 Future, 1985.
100

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                                                                      Bibliography
  orn^,-M;i^ She?£' md A' KneeSe' "Impacts' Costs "d Techniques for Mitigation
      °                       A Review."  Water Resources Research, vol. 20, 1984, pp.
  References for Chapter 6:  Analyzing Costs and Benefit
                                 ic Losses from Ground Water Contamination:  An


                                                                         vol. 26,
 Brookshire, D.S., R.C. d'Arge, W.D. Schulze, and M.A. Thayer. "Experiments in


                  AA ?*? '^ °t AltematiVe ^^ MeaSUreS °f A?Po

             ^^
 Brookshire, D.S., L.S. Eubanks, and C.F. Sorg.  "Existence Values and Normative


                                                                         , vol.
        ' ^"h S"*' N' KiSh°r' ^ T' McConnell.  77^ Estimation of Consumer

             i  w T;, ^ ??«*»" ^««*«fc «rf «»« otote 4»«S£ ,
              .  Washington, DC:  Resources For the Future, 1990.



 Cummings, R.G., D.S. Brookshire, and W.D. Schultz.  Valuing Environmental Goods- An


 ISSST&f A0nti^nt fr'^ Meth°d'  TOteWa' New Jersey:~m^t
 Allanheld, 1986.  A critique of the contingent valuation method.



 Dmman DonA.  Mail and Telephone Surveys.  New York:  John Wiley & Sons  Inc

 1978. A survey technique reference.




 S^' S'  ^^ WCW f°r Gr°Und Water Protection." Journal of Environmental
Economics and Management, vol. 15, 1988, pp. 45-457.



Edwards, S and G. Anderson.  "Overlooked Biases in Contingent Evaluation Surveys-

Some Considerations." Land Economics, vol. 62, no. 2, 1987, pp. 168-178.        '
                                                                             101

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                                                                         Bibliography
  Erdos, Paul L.  Professional Mail Surveys.  Malabar, Florida:  Robert E Krieger
  Publishing, 1983.  A survey technique reference.

  Fisher, Ann.  "The Value of Reducing Risks of Death:  A Note on New Evidence." Journal
  of Policy Analysis and Management, vol. 8, no. 1, Winter 1989, pp. 88-100.

  Freeman, A.M. m.  The Benefits of Environmental Improvement:  Theory and Practice
  Baltimore: Johns Hopkins Press for Resources For the Future, 1979.  A standard reference
  for benefit evaluation methods.

  Freeman, A.M. "Hedonic Pricing, Property Values, and Measuring Environmental Benefits-
  VQTO  ey °^?J.Issues'"  Jou™il of Environmental Economics and Management, vol. 13,
  •!•"/", pp.    -
 Hanemann, W.M.  "Information and the Concept of Option Value." Journal of
 Environmental Economics and Management, vol. 16, 1989, pp. 23-27.

 Kneese, A.V.  Measuring the Benefits of Clean Air and Water.  Washington  DC-
 Resources For the Future, 1984.  A good discussion  of examples showing how benefit
 estimation methods have been applied to actual environmental issues, including one ground
 Kish, Leslie.  Survey Sampling.  New York:  John Wiley & Sons, Inc., 1965.  A survev
 reference, including sampling issues.

 Lindsay, B.  "The Willingness to Pay for Ground Water Protection."  Water Resources
 Research, vol. 26, no.  9, 1990, pp. 1869-1875.

 Loomis,J.  Expanding Contingent Value Sample Estimates to Aggregate Benefits: Current
 Practices, Proposed Solutions."  Land Economics, vol. 63, 1988, pp. 396-402.

 McClelland, Gary H., William D. Schulze, Jeffrey K. Lazo, Donald M. Waldman, James K
 Doyle, Steven P. Elliott, and Julie R. Irwin. Methods for Measuring Non-Use Values- A
 Contingent Valuation Study of Groundwater Cleanup.  Prepared for Office of Policy
 Planning and Evaluation, U.S. Environmental Protection Agency.  Boulder,  Colorado-
 Center for Economic Analysis, University of Colorado, Boulder, September 1992
102

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                                                                         Bibliography
         ' *' SS"!3' a"d V' KeITy Sraith'  "Market Segmentation and Valuing Amenities

                               of Hazardous Waste Sites>-
 Mishan E.  Cost Benefit Analysis. New York:  Praeger Publishing  1986  A standaitf

 textbook on the concepts and methods of cost-benefit analysis, wiU, some exlpS



 Mitchell, RC. and R.T. Carson.  Using Surveys to Value Public Goods  Washington  DC-
 Bethesda, Maryland: Amencan Water Resources Association, 1990, pp. 543-551
              «               d C°StS °f Policies Related to Ground Water
       ination." Land Economics, vol. 62, no. 3, 1986, pp. 33-45.




        ' R« Lw "A ^°nceptual Framework for Measuring the Benefits of Ground Water
       on." Water Resources Research, vol.  19, 1983, pp. 320-326.




2S2^ S"D' andDB'E- Lindsay-  BThe Willingness to Pay for Ground Water Protection "
Water Resources Research, vol. 26, no. 9, 1990, pp. 1869-1875.           protection.



Smith,  V .K "The Valuation of Environmental Risks Using Hedonic Water Models "  In M
methods for benefits estimation, including a discussion of hedonic
                                                           pricing

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                                                                        Bibliography





  Thomas, J.F. and G. J. Syme.  "Estimating Residential Price Elasticity of Demand for Water
  A Contingent Valuation Approach."  Water Resources Research WRERAO vol 24  no 11
  November 1988, pp. 1847-1857.                                          '   '      '


  U.S. EPA.  Benefit-Cost Assessment Guidebook for Water Programs,  Volume 1 Draft  1983
  Not published by EPA, but contains a very good discussion of the methods and'the limits of'
  cost-benefit assessment for water programs, if available.


  U.S. EPA.  The Economics of Improved Estuarine Water Quality: An EPA Manual for
  Measuring Benefits. EPA/503-5-90/001.  1990. An application of benefit assessment
  methods to another type of water-related resource.


  U.S. EPA.  Guidelines for Performing Regulatory Impact Analysis, Appendix A (1988)
  EPA/230/01-84/003.  1988. Contains EPA standards for conducting ^^4 analysis for
  regulatory impacts.


 U.S. EPA. Risk Assessment Guidance for Superjund, Volume 1:  Human Health Evaluation
 Manual (Part A).  EPA/540/1-89/002.  1989.  Contains EPA standards and methods fo7
 health risk assessment.


 U.S. Water Resources  Council. Economic  and Environmental Principles for Water and
 Related Land Resource Implementation Studies. Washington, DC: U.S. GPO,  1983.   ;
104

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