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
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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:
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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:
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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.
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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:
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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.
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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
-------
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.
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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.
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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.
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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).
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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.
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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).
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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).
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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
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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
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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.
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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
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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
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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.
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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.
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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.
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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
-------
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£ ,
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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-
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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
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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
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McClelland, Gary H., William D. Schulze, Jeffrey K. Lazo, Donald M. Waldman, James K
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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
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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.
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104
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