&EPA
United States
Environmental Protection
Agency
Office of Water (4602)
Office of Policy, Planning
and Evaluation (2127)
EPA 230-B-95-003
October 1995
A Framework for Measuring
the Economic Benefits of
Ground Water
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EPA 230-B-95-003
A FRAMEWORK FOR MEASURING THE ECONOMIC
BENEFITS OF GROUND WATER*
October 1995
"This report is the product of the EPA Interoffice Groundwater Valuation Workgroup that included two economists
outside the Agency Workgroup members are identified on the following page
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Workgroup Members
Kevin J Boyle, Department of Resource Economics & Policy, University of Maine
John C Bergstrom, Department of Agricultural & Applied Economics, University of Georgia
Charles Job, Office of Groundwater and Drinking Water
Mary Jo Kealy, Office of Policy Planning and Evaluation
Ron Bergman, Office of Groundwater and Drinking Water
Rodges Ankrah, Office of Policy Analysis
Ghulam Ah, Office of Pesticides Programs
Jihad Alsadek, Office of Pesticides Programs
Gary Ballard, Office of Solid Waste
Vivian Daub, Office of Water
Jacolyn Dziuban, Office of Radiation Programs
Dick Howes, Office of Emergency and Remedial Response
Susan Schulze, Water Management Division (Region II)
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Table of Contents
Introduction 1
Framework for Valuing Ground Water 3
Defining Ground Water Values 4
Ground Water Functions 8
Ground Water Services 18
Effects of Changes in Ground Water Services 19
Measuring Economic Values 20
Aggregation Issues 23
Uncertainty in Ground Water Valuation 24
Intergenerational Issues 25
Previous Ground Water Valuation Studies 27
Ground Water Valuation and Regulatory Impact Analyses 37
Draft Class V Injection Well Regulatory Impact Analysis 37
Draft RIA for Final Rulemaking on Corrective Action for Solid Waste
Management Units 39
Summing Up 41
A Structure for Considering the Value of Ground Water 43
Protocol Components 44
Concluding Comments 53
References Cited 55
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List of Tables
Table 1 FUNCTION STORAGE OF WATER RESERVE (STOCK) 9
Table 2 FUNCTION DISCHARGE TO STREAMS/LAKES/WETLANDS 13
Table 3 Ground Water Conditions in Study Areas 31
Table 4 Information Presented on Ground Water Commodity
(Change in Services) 33
Table 5 Changes in Ground Water Services - Stock Function 48
Table 6 Changes in Ground Water Services - Discharge Function 49
Table 7a Available Data for Valuing Changes in Ground Water Services -
Stock Function 51
Table 7b Needed Data for Valuing Changes in Ground Water Services -
Stock Function 52
Table 8 Other Valuation Considerations for Changes in Ground Water
Services - Stock Function 53
List of Figures
Figure 1 5
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1
I. INTRODUCTION
The primary goal of this report is to develop a framework for valuing ground water that
is applicable to all offices within U S EPA (EPA hereafter) that consider the value of ground
water resources when conducting Regulatory Impact Analyses (RIAs)' The precedent for this
effort was set with the development of "A Guide for Cost-Effectiveness and Cost-Benefit
Analysis of State and Local Ground Water Protection Programs" by EPA's Office of Water
(United States Environmental Protection Agency, 1993) The guide provides a concise
discussion of the processes for accomplishing these types of analyses, but does not provide
specificity regarding the estimation of ground water values It is the intent of this report to begin
to develop the framework for a comparable guide for assessing the economic value of ground
water We use the term value in a generic sense such that the values associated with reductions
in ground water quantity or quality may be considered losses and, conversely, increases are
deemed benefits
The objectives of this report are to
1 Provide a conceptual framework for identifying and measuring the economic value of
ground water
2 Consider the extent to which the benefits of ground water protection, as suggested by the
valuation framework, have been accounted for in previous RIAs, and
3 Provide guidelines for utilizing the valuation framework to consistently value ground
water across EPA offices and policy issues within offices
1 Although we limit our application of the valuation framework in this report to RIA's, the framework can also be
applied to other ground water policies and programs
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2
The next section of this report describes the conceptual framework for identifying and measuring
the economic value of ground water The valuation framework links changes m physical
characteristics of ground water to uses (services) provided by ground water and the economic
effects of changes in ground water services Almost all EPA program offices, in the course of
their respective missions, develop policies or programs that can affect the condition of ground
water resources For example, issues relating to pesticides and resulting decisions by the Office
of Pesticides can have implications for ground water quality in areas where pesticides are
produced or in areas where the pesticides are applied Similarly, actions by the Office of Solid
Waste related to superfund sites can have implications for ground water quality Having a
consistent blue print for ground water valuation can serve to avoid duplication of effort, and can
help to ensure consistency in ground water value assessments within and across offices
Before moving to a discussion of how the ground water valuation framework applies to
RIAs, we discuss studies that have investigated the value of ground water We do this because
RIAs are often dependent on data available in the literature and discussing existing studies helps
to amplify issues raised in regard to the conceptual foundation for valuing ground water The
discussion of existing ground water valuation studies is presented in Section III and we focus on
the commodity definitions as this issue is unique to ground water applications
It was decided as part of the development of this report that the illustrative applications
would focus on two recent RIAs This was done because the field of environmental valuation is
evolving rapidly and RIAs conducted five to ten years ago had limited access to much of the
ground water valuation data currently available It was also believed that the selected RIAs
present the most comprehensive evaluations of ground water conducted by EPA for RIAs The
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3
RIAs examined are the "Class V Injection Well Regulatory Impact Analysis and Regulatory
Flexibility Analysis" by the Office of Water (U S EPA, 1993) and "Draft Regulatory Impact
Analysis for the Final Rulemaking on Corrective Action for Solid Waste Management Units" by
the Office of Solid Waste (Cadmus Group, 1993)
In the final section, Section V, we suggest initial guidelines for developing a common
approach for valuing ground water across offices These guidelines should be equally
appropriate for the design of original studies as well as selecting available studies for
transferring estimates to new applications in current RIAs
II. FRAMEWORK FOR VALUING GROUND WATER
Any assessment of the effect of EPA programs or policies on the economic value of
groundwater begins with the investigator making a number of decisions that define the
conceptual and empirical domain of the investigation These decisions are the direct
consequence of explicit and implicit questions posed by the investigators) and to a large extent
determine the outcome of the investigation A fundamental issue is the definition of the change
in the condition of a resource and the ensuing changes in services generated by the resource, i e ,
commodity definition This begins with an understanding of whether the change has occurred or
is proposed Given ex post or ex ante standing, the next step is to develop a technical definition
of the reference condition of the resource and identify whether the increment of change is an
enhancement or dimmishment of the quantity and quality of the resource For either
enhancement of, or preventing harm to, the expected condition of the resource must be defined
Differences between the reference condition and expected condition define the change in the
quantity and quality of a resource to be evaluated Consideration should also be given as to
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4
whether the mechanism(s) employed to accomplish the change can achieve the proposed
resource condition with certainty It is also necessary to know the geographical extent of the
changes to address the issue of whose values should count m the computation of aggregate
benefits or costs This information collectively constitutes the formal commodity definition for
a resource being valued These questions must be asked for original investigations of value as
well for transfers of value estimates to unstudied sites
After the commodity definition is established, it is necessary to map changes in the
resource condition into changes in the provision of services from which humans derive value
Accomplishing this step can be difficult regardless of whether an original investigation or
transfer exercise is being performed Benefit transfer practitioners have an added complication
in that they must interpret value estimates at study sites and assess their transferabihty,
conceptually and statistically, to the policy site In turn, the increment of change being
evaluated at the policy site must be carefully defined, not only for relevance to the current policy
issue, but also to accomplish the transfer exercise itself
Defining Ground Water Values
Valuing ground water requires a clear definition of the ground water "commodity" to be
valued Figure 1 summarizes the technical data required to define a ground water commodity
The first step is monitoring (Box 1) to assess the current or baseline aquifer condition in quantity
and quality dimensions (Box 2) The next step is to assess how the current quantity and quality
of ground water will change "with" and "without" the proposed regulation (Boxes 3 and 4)
These factors include extraction rates, natural recharge and discharge, natural contamination
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(e g, salt infiltration) and human-induced contamination (e g , pesticide contamination,
industrial chemical contamination), and public policies regarding the use and protection of
ground water The results of the assessments provide estimates of the reference (without policy)
water quantity (X°) and quality (Q°), and the subsequent (with policy) water quantity (X1) and
quality (Q1) (Boxes 5 and 6) Given estimates of the reference and subsequent ground water
conditions, we define the change in water quantity and quality (X° - X1, Q° - Q1) (Box 7) The
steps and linkages illustrated by Boxes 1-7 primarily involve the work of hydrologists,
geologists, engineers, ecologists, soil scientists, and other physical and biological scientists
Investigations of ground water conditions by these specialists must be sufficient to identify
changes in ground water services linked to the prescribed policy in a manner that facilitates the
estimation of economic values Formally modeling the steps illustrated by Boxes 1-7 represents
one of the greatest challenges that needs to be addressed to estimate economic values of ground
water protection
FIGURE 1. The Production of Benefits From Improved Ground Water Quality or
Quantity
1
AQUIFER MONITORING
CURRENT QUANTITY AND QUALITY
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ASSESSMENT OF FACTORS
AFFECTING QUANTITY AND
QUALITY "WITHOUT POLICY"
ASSESSMENT OF FACTORS
AFFECTING QUANTITY AND
QUALITY "WITH POLICY"
REFERENCE WATER QUANTITY (X*)
AND QUALITY (Q°)
SUBSEQUENT WATER QUANTITY (X1)
AND QUALITY (Q1)
CHANGE IN WATER QUANTITY AND QUALITY
(X° - X1, Q' - Q1)
8
CHANGE IN GROUNDWATER SERVICES
S" = f(X°, Q°| S|) TO S1 = f(X', Q11 S|)
ECONOMIC VALUE (BENEFITS)
V=g(AS| S£), WHERE AS=S°-S'
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Reference services (S°) supported by ground water are determined by the without policy
ground water quantity (X°) and quality (Q°) and subsequent services (S1) are determined by the
with policy ground water quantity (X1) and quality (Q1) Reference and subsequent ground
water services are conditional upon given levels of substitute and complementary service flows
(S^) (Box 8) The interactions of scientists and policy analysts facilitate the mapping of changes
in the condition of ground water to changes m service flows which affect economic activities
We can then estimate economic value (e g, wilhngness-lo-pay) as a function of the change in
the ground water service flows, given the specified reference and subsequent ground water
conditions, and service flows from substitutes and complements to the ground water resource
(Box 9)
The steps and linkages illustrated by Boxes 8 and 9 involve the work of economists,
building on the biophysical analyses developed for Boxes 1-7 2 It is difficult to overemphasize
this important point When it tomes to estimating economic values associated with natural
resource service flows, the most complex and limiting step is often establishing clear linkages
between changes in the biophysical condition of a natural resource and changes in natural
resource policies or programs Economic valuation of ground water therefore requires that
progress be made on two fronts establishing formal linkages between ground water protection
policies and changes in the biophysical condition of ground water (Boxes 1-7), and developing
these linkages in a manner that allows for the estimation of policy-relevant economic values
(Boxes 8-9) Ideally, steps 1 through 9 involve interactions and cooperation between economists
and other scientists to ensure a smooth and productive flow of data and models to develop
policy-relevant ground water value estimates
2We use the term "biophysical" to indicate biological, ecological, hydrologic, chemical, and other physical factors
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Ground Water Functions
The linkages between biophysical changes in ground water quantity or quality (Box 7),
changes in ground water services (Box 8) and changes in economic values (Box 9) can be better
understood by considering aquifer functions The biophysical dimensions of ground water
quantity and quality determine two broad functions of any aquifer The first function is storage
of a water reserve or stock (Table 1) Ground water stored in an aquifer provides a reserve of
water with given quantity and quality dimensions The quantity dimension includes the amount
of ground water available within a specific geographic region in a given time period, and the
change in this quantity over time from recharge and extraction Rates of natural recharge,
natural discharge, and human-induced extraction must be considered Quality includes both
natural and human induced contaminants that may affect the services to which ground water can
be applied in a given time period, and the change in quality over time due to natural filtration
and the leaching of contaminants The rates of human-induced contamination and natural
sources of contamination must also be considered
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Table I FUNCTION STORAGE OF WATER RESERVE (STOCK) Ground water stored in an aquifer provides a reserve (stock)
of water which can be directly used to generate service! Potential service flows and effects of these services are listed below
SERVICES
EFFECTS
VALUATION
TECHNIQUES
Provision of Drinking Water
Change in Welfare from Increase or
Decrease in Availability of Drinking
Water
Change in Human Health or Health Risks
Market Price/Demand Function
Supply or Cost Function
Producer/Consumer Cost Savings
Contingent Valuation
Hedonic Price/Property Value
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Wage
Averting Behavior
Benefits Transfer
Provision of Water for Crop
Irrigation
Change in Value of Crops or Production
Costs
Change in Human Health or Health Risks
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Property Value
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Wage
Averting Behavior
Benefits Transfer
Provision of Water for Livestock
Change in Value of Livestock Products
or Production Costs
Change in Human Health or Health Risks
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Property Value
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Wage
Averting Behavior
Benefits Transfer
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Table 1 Continued
4
5
6
7
8
9
10
Provision of Water for Food
Product Processing
Provision of Water for Other
Manufacturing Processes
Provision of Heated Water for
Geothermal Power Plants
Provision of Cooling Water for
Other Power Plants
Provision Water/Soil Support
System for Preventing Land
Subsidence
Provision of Erosion and Flood
Control through Absorption of
Surface Water Run-Off
Provision of Medium for
Wastes and Other By Products
of Human Economic Activity
Change in Value of Food Products or
Production Costs
Change in Human Health or Health
Risks
Change in Value of Manufactured
Goods or Production Costs
Change in Cost of Electricity
Generation
Change in Cost of Electricity
Generation
Change in Cost of Maintaining
Public or Private Property
Change in Cost of Maintaining
Public or Private Property
Change in Human Health or Health
Risks Attributable to Change in Ground
water Quality
Change in Animal Health or Health
Risks Attributable to Change in Ground
water Quality
Change in Lconomic Output
Attributable to Use of Ground water
Resource as "Sink" for Wastes
Market Pnce/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedomc Price/Property Value
Benefits Transfer
Market Pnce/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedomc Price/Wage
Averting Behavior
Benefits Transfer
Market Pnce/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
Market Pnce/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
Market Pnce/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
Market Pnce/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
Market Pnce/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedomc Price/Wage
Averting Behavior
Benefits Transfer
Market Pnce/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Averting Behavior
Benefits Transfer
Market Pnce/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
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Table 1 Continued
11
12
Provision of Clean Waler
through Support of Living
Organisms
Provision of Passive or Non
Use Services (e g Existence or
Bequest Motivations)
Change m Human Health or Health
Risks Attributable to Change in Water
Quality
Change in Animal Health or Health
Risks Attributable to Change in Wate
Quality
Change in Value of Economic Output
or Productions Costs
Attributable to Change in
Water Quality
Change in Personal Utility
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedomc Price/Wage
Averting Behavior
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Averting Behavior
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
Contingent Valuation
Benefits Transfer
•These valuation methods are described briefly in U S EPA 1991 and in greater detai in Braden and Kolstad 1991 and Freeman 1993
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The second function is discharge to surface water (streams, lakes, and wetlands) (Table
2) In the Eastern U S , for example, the base flow of many streams and rivers is supported by
ground water discharge Through discharge to surface water, ground water indirectly
contributes to the services generated by surface waters and wetland ecosystems Once again
there are quantity and quality dimensions in terms of rates of discharge to surface waters and the
quality of the discharge supply It should also be noted that surface water may recharge ground
water In this case, a portion of the services provided under the water reserve or stock function
should be attributed to surface water To simplify exposition we focus on the flow of water
from ground water to surface water Similar logic can be applied to develop values for the
effects of surface water flows to ground water
The share of surface water services that can be legitimately credited to ground water is
very difficult to quantify The primary challenge is to model the physical interactions between
ground water and surface water services such that the incremental (marginal) contributions of
ground water discharge to surface water can be identified and measured This task is necessary
to avoid double-counting of service flows and, in turn, economic values (e g , attributing the
same service and associated value to both ground water and surface water) For example,
assume an aquifer provides a major source of recharge water for a stream which is heavily used
for recreational fishing Assume also that normal land run-off also contributes substantially to
the flow of the stream Suppose two water quality protection policies are implemented during
the same time period One policy is targeted towards the recharge aquifer and the other is
targeted towards land run-off
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Table 2 FUNCTION DISCHAKCf TO STREAMS/LAKES/WETLANDS C round water contributes to the flow or stock of water
in streams, lakes, and wetlands A portion of surface water and wetlands services ire therefore attributable to the ground water
resource Potential service flows and effects of these services are hsled below
SERVICES
tFFECTS
VALUATION
TECHNIQUES
Provision of Drinking Water
through Surface Water Supplier
Change in Welfare from Increasi or
Decrease in the Availability of
Drinking Water (Access Value)
Change in Human Health or
Health Risks
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Property Value
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Wage
Averting Behavior
Benefits Transfer
Provision of Water for Crop
Irrigation through Surface Water
Supplies
Change in Value of Crops or
Production Costs
Change in Human Health or Health
Risks
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Property Value
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Wage
Averting Behavior
Benefits Transfer
Provision of Water for Livestock
through Surface
Water Supplies
Change in Value of Livestock Products
or Production Costs
Change in Human Health or Health
Risks
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Property Value
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Wage
Averting Behavior
Benefits Transfer
Provision of Water for Food
Product Processing through
Surface Water Supplies
Change in Value of Food Products or
Production Costs
Change m Human Health or Health
Risks
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Property Value
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic Price/Wage
Averting Behavior
Benefits Transfer
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Table 2 Continued
Provision of Water for Other
Manufacturing Processes through
Surface Water Supplies
Change in Value of Manufactured
Goods or Production Costs
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
Provision of Cooling Water for
Power Plants through Surface
Water Supplies
Change in Cost of Electricity
Generation
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
Provision of Erosion Flood,
and Storm Protection
Change in Cost of Maintaining Public
or Private Property
Change in Human Health or Health
Risks through Personal Injury
Protection
Change in Economic Output
Attributable to Use of Surface Water
Supplies for Disposing Wastes
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedomc Price/Wage
Averting Behavior
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
Transport and Treatment of
Wastes and Other By Products of
Human Economic Activity
through Surface Water Supplies
Change in Human Health or Health
Risks Attributable to Change in
Surface Water Quality
Change in Animal Health or Health
Risks Attributable to Change in
Surface Water Quality
Change in Economic Output
Attributable to Use of Surface Water
Supplies for Disposing Wastes
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedomc Price/Wage
Averting Behavior
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Averting Behavior
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
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Table 2 Continued
Support of Recreational
Swimming, Boating hshing
Hunting Trapping and Plant
Gathering
Change in Quantity or Quality
Recreational Activities
Change in Human Health or Health
Risks
Market Price/Demand Function
Supply or Cost Function
C onsuraer/Producer Cost Savings
C ontmgent Valuation
1 ravel Cost Method
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedomc Price/Wage
Averting Behavior
Benefits Transfer
10
Support of Commercial Fishing
Hunting
Trapping, Plant Gathering
Change in Value of Commercial
Harvest or Costs
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
11
Support of On Site Observation
or Study of Fish Wildlife, and
Plants for Leisure, Educational or
Scientific Purposes
Change in Quantity or Quality of On
Site Observation or
Study Activities
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Travel Cost Method
Benefits Transfer
12
Support of Indirect, Off Site Fish
Wildlife and Plant Uses (e g
viewing wildlife photos)
Change in Quantity or Quality of
Indirect, Off Site Activities
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Travel Cost Method
Benefits Transfer
13
Provision of Clean Air through
Support of Living Organisms
Change in Human Health or Health
Risks Attributable to
Change in Air Quality
Change in Animal Health or Health
Risks Attributable to
Change in Air Quality
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedomc Pnce/Wage
Averting Behavior
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Averting Behavior
Benefits Transfer
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Table 2 Continued
14
Provision of Clean Water through
Support of Living Organisms
Change m Human Health or Health
Risks Attributable to
Change in Water Quality
Change m Animal Health or Health
Risks Attributable to
Change in Water Quality
Change in Value of Economic Output
or Productions Costs
Attributable to Change in Water
Quality
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedomc Price/Wage
Averting Behavior
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Averting Behavior
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
15
Regulation of Climate through
Support of Plants
Change in Human Health or Health
Risks Attributable to
Change in Climate
Change in Animal Health or Health
Risks Attributable
to Change m Climate
Change in Value of Economic Output
or Production Costs
Attributable to Change in Climate
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedomc Price/Wage
Averting Behavior
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Averting Behavior
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
16
Provision of Non-Use Services
(e g Existence Services)
Associated with Surface Water
Body or Wetlands Environments
or Ecosystems Supported by
Ground water
Change in Personal Utility
or Satisfaction
Contingent Valuation
Benefits Transfer
•These valuation methods are described briefly in U S LPA 1991 and in greater detail in Braden and Kolstad 1991 and Freeman 1993
U S EPA Headquarters Library
Mail code 3404T
1200 Pennsylvania Avenue NW
Washington, DC 20460
202-566-0556
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Assume the policies will collectively increase recreational fish catch by 50% The economic
value of this increase in fish catch cannot be attributed to both policies In order to avoid double-
counting, the total economic value of this increase m fish catch should be divided between the
two policies based on the relative contribution of each policy to the 50% increase in fish catch
Because of the interrelationships between ground water and surface water, surface water
recharge to ground water and from ground water discharge to surface water, the aquifer
functions listed in Tables 1 and 2 are not independent Ground water recharge and discharge are
both part of the water reserve or stock function because each affects the quantity and quality of
water which exists in an aquifer in a given time period Ground water recharge and discharge
also are both part of the surface discharge function because both affect the quantity and quality
of surface water Because ground water discharge affects a different set of economic services
supported by surface water quantity and quality, we include ground water discharge to surface
water as a separate function (primarily for economic benefit accounting purposes) From a
biophysical or ecologic perspective, however, it should be kept in mind that our two broad
functions are highly interrelated Interrelationships between these two functions need to be
accounted for when modeling the linkages between policy changes, changes in ground water
quantity or quality, and changes in economic values, as illustrated in Figure 1
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Ground Water Services
As with value, we use the term "service" in a neutral sense to imply that a service is
neither inherently good nor bad Services may have both positive and negative effects.
depending upon the affected party's preferences or perspective Services associated with the
water reserve or stock function are listed in Table 1 A major service with this function is the
provision of drinking water In the United States, ground water accounts for about 35 percent of
public water supplies and 80% of rural domestic supplies (American Institute of Professional
Geologists, 1985) Overall, ground water supplies drinking water to 53 percent of the U S
population (this figure includes private wells) Ground water is also extracted for use in
irrigated agriculture, many industrial purposes, heated water for geothermal power plants, and
cooling water for other power plants
In some regions of the United States, ground water provides the service of supporting
underground water/soil structure which acts to prevent land subsidence (sinkholes) The water
storage function also helps to control flooding and erosion by providing a medium for absorbing
surface water run-off The underground water/soil structure of an aquifer also provides a
medium for the absorption, transport, and dilution of wastes (e g , sewage) and other by-products
of human economic activity Note that each of these services are jointly provided by soil
structure and ground water in a given area As with the services of the surface water discharge
function, the incremental (marginal) contributions of ground water to these services must be
quantified
An aquifer may also generate non-use or passive use services (Bishop and Welsh, 1992,
Freeman, Chap 5, 1993) For example, these services may be attributable to the mere existence
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of an aquifer, independent of any current or future use Alternatively, passive use services of
providing potable drinking water to future generations may arise from bequest motivations on
the part of the current generation
Most major services provided by ground water under the water reserve or stock function
are also included as indirect services associated with the surface water discharge function (Table
2) To the extent that ground water supports healthy and abundant surface waters, it also
contributes to a variety of services generated by these environments These services include
recreational swimming, boating, fishing, hunting/trapping and plant gathering, and commercial
fishing, hunting/trapping and plant gathering Unless biophysical data are available to identify
ground water's marginal contributions to these services, there is a high probability of double
counting such that surface water values may be assigned to ground water or vice versa
Effects of Changes in Ground Water Services
Moving towards the goal of estimating changes in economic values (Box 9, Figure 1), we
need to identify the effects on (changes in) economic activities resulting from changes in ground
water services Examples of potential effects on economic activities are listed m the second
columns of Tables 1 and 2 Under the "stock" function, for example, the potential effects of a
change in the provision of drinking water include a change in utility from an increase or
decrease in the availability of drinking water (access/quantity) and a change in human health or
health risks (quality)
Defining changes m human health or health risks requires careful consideration of such
issues as changes in mortality and morbidity, and cancerous and noncancerous health threats
Identification of the various types of health effects which can result from changes in ground
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water quality requires input from health professions What is ultimately needed are dose-
response models that link contaminant sources to changes in contaminants in ground water and
then changes in human health These dose-response models will facilitate defining the baseline
and alternative service flows (S° and S1) and the estimation of policy-relevant values Such
linkages are essential for identifying changes in all service flows, not just human health effects
Measuring Economic Values
Complete valuation of a change in the condition of ground water involves measuring the
economic values for all relevant changes in ground water services associated with changes in the
X and Q vectors Economic values for ground water protection or remediation should capture
the value for the total change in the ground water condition (X1 - X°, Q1 - Q°)3 Thus, as
suggested in the previous section, extensive knowledge of the ground water resource itself and
its functions are crucial to defining the change in service flows, and the effects on economic
activities of these changes in service flows
Once changes in ground water services are identified and quantified (Box 8, Figure 1),
the final step in the benefit estimation process is to assign monetary values to these service
changes (Box 9, Figure 1) When measuring the economic value of environmental changes,
theoretically appropriate measures of changes in consumer and producer welfare (or well-being)
must be used There is a consensus among economists that Hicksian compensating or equivalent
welfare measures should be used (Freeman, Chaps 3 and 4, 1993, Just, Hueth, and Schmitz,
3 See Boyle and Bishop (1987) for an application of total valuation to valuing endangered
species
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1982, Varian, 1978) Because of problems with estimating willingness to accept, the most
commonly applied measure of natural resource economic values is an individual's maximum
willingness to pay (WTP) Hicksian WTP measures (compensating or equivalent) should reflect
both the quantity and quality dimensions of the ground water resource being valued
A number of empirical techniques are available for estimating changes in economic value
associated with changes in ground water services We do not attempt to define and explain each
potential valuation technique in detail in this report An overview of valuation techniques
relevant to ground water quantity and quality is provided in U S EPA Appendix A, (1983) and
in Bergstrom, et al, (1996) More detailed descriptions of valuation techniques for
environmental policies, including advantages and disadvantages of the various techniques, can
be found in a number of references (e g , Braden and Kol&tad, 1991, Freeman, 1993) We list
potential valuation techniques for changes in ground water services in the last column of Tables
1 and 2 Although we advocated estimates of Hicksian welfare in the preceding paragraph, each
of the techniques listed in the tables that utilize market, or choice, based data yield estimates of
Marshalhan surplus, i e , income is held constant rather than utility We do not intend to imply
that estimates of Marshalhan surplus are not appropriate for valuing ground water Rather, these
are not the conceptually desired measures
Selection of a valuation technique for a particular policy application (e g, RIA) involves
many considerations All else constant, techniques that measure maximum Hicksian WTP with
minimal bias are preferred Consumer/producer cost savings estimates, for example, may only
provide minimum estimates of value because they do not reflect maximum WTP based on
consumer preferences or producer production functions Another major consideration is data
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availability In many environmental valuation situations, revealed preference data (e g , water
market data) are not available In contrast, contingent valuation relies on stated preference data
(e g, data on preferences obtained directly from people in a survey setting), measure Hickslan
WTP directly, and can be applied to value a wide variety of the services listed in Tables 1 and 2
The largest distinctions between contingent valuation and revealed preference techniques is that
contingent valuation measures Hicksian surplus and is the only methodology capable of
measuring nonuse values The application of contingent valuation to measuring nonuse values,
however, is currently a subject of much debate (e g , see Arrow et al, 1993)
Other important factors an analyst must consider when selecting a valuation technique
include the time and expense involved in implementing the technique as compared to the timing
of policy decisions for which the value estimates are needed and the available budget for the data
collection and value estimation process Related to the time and expense of implementing a
valuation technique is the decision-makers desired levels of accuracy and reliability associated
with value estimates In general, increased accuracy and reliability (in a statistical sense)
requires greater allocations of both time and money For certain policy decisions, extremely
high levels of accuracy and reliability may be required For other policy decisions, decision-
makers may be able to tolerate ("make do with") lower levels accuracy and reliability
In a number of cases, the selection of a valuation technique, or techniques, is a fairly
clear-cut decision (e g , data availability may dictate the decision) In other cases, the decision
may not be so clear The final selection is likely to involve a "balancing" of all relevant
considerations (e g, theoretical consistency, data availability, estimation robustness, time
constraints, budget constraints, acceptable accuracy and reliability)
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Aggregation Issues
Once the economic value of ground water to an individual is determined, aggregate
economic value is estimated by summing individual economic values (e g , mean willmgness-to-
pays) over the total number of people in the "market area" of a particular aquifer who utilize
water from the aquifer, and summing these values over tune (Freeman, Chap 7, 1993) For a
given aquifer, there are likely to be different market areas associated with each of the services
listed m Table 1 Determining the scope of these market areas is a complex process, involving
careful study of the spatial distribution of consumers and producers who benefit from the
services of ground water from a specific aquifer
There is not, however, a clear consensus in the literature as to how to determine market
size Nearly all environmental economists agree that the market should include all individuals
who are affected by a change in the condition of ground water resource, but this agreement
breaks down when discussions move to who specifically is affected This problem is
exacerbated for nonuse values In addition, physical data is often missing to develop direct links
between changes in ground water and potentially affected populations, as we will note in the
review of existing ground water valuation studies (the does-response function called for above)
Ground water policies also result in changes in the flow of ground water services over
some time horizon (e g , 50 years) The economic value of the policy in each time period (t) is
the difference in the value of ground water quantity and quality with the policy m that time
period (Xj,Qj) and the value of what ground water quantity and quality would have been without
the policy (X°,Qt) That is,
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The total value of the ground water resource over the planning horizon (T) is the discounted sum
of the values attributable to all individuals affected by the change in ground water services in
each time period (AS,)
Uncertainty in Ground Water Valuation
Because we have to deal with imperfect data regarding the quantity and quality of ground
water, the actual changes in ground water services may be uncertain with associated probabilities
of occurrence This uncertainty may exist with respect to both the current level of services (S°)
projected into the future and the alternative level of services (S1) Thus, we are dealing with
expected, rather than deterministic, changes in services
The expected changes in ground water service flows is a function of possible alternative
changes in the baseline and future ground water conditions, and the probabilities of each one of
these alternatives occurring In some situations, there may be a number of possible alternative
service flow changes, each having a different probability of occurring In other situations, there
may be only one service flow of interest with several competing policies for accomplishing the
goal and each policy has a different probability of success
When demand and (or) supply uncertainty are present, measures of economic value (e g ,
willmgness-to-pay) should reflect this uncertainty The appropriate welfare measure is option
price (Bishop, 1982, Smith, 1983, Freeman, Chap 8, 1993) Option pnce is defined as a
representative individual's maximum willmgness-to-pay to obtain a specific ground water
condition with certainty Measurement of option prices is primarily accomplished using
contingent valuation (Mitchell and Carson, 1989)
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Intergenerational Issues
In many cases, the effects of ground water depletion and contamination may be long-
term in nature, raising concerns related to mtergenerational equity and irreversibihty The
process of discounting benefits to calculate present values automatically downweights future
benefits Assuming the same monetized value of aggregate benefits in each time period,
discounting results in an ever decreasing present value of benefits in each successive time
period After a certain point in the future (e g 50 years), the discounting process renders the
present value of future benefits trivial Thus, it is sometimes argued that the process of
discounting or downweightmg future benefits to calculate present values is "unfair" to future
generations Moreover, the benefits, costs and discount rate used in any analysis are solely
representative of the preferences of the current generation
Intergenerational equity or fairness concerns have resulted m debates over how best to
(or not to) discount future benefits These concerns have often focused discussion on the choice
of a discount rate to use in calculations of net present values Individuals and groups who desire
to see more weight placed on future benefits, for example because of concern over the well-
being of unborn generations, argue for lower discount rates Individuals and groups who are
more worried about the negative effects on the current economy of reducing current private
consumption argue for higher discount rates (Sassone and Schaffer, Chap 6, 1978)
The discount rate used in ground water policy analysis, or the analysis of any public
program, is based on societies' marginal time preference for consumption Since this concept is
difficult to quantify, we believe the choice of a discount rate is fundamentally a normative
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decision In the case of environmental policy analyses, this decision has been made by some
branch or office of the federal government (Office of Management and Budget, 1992) That is,
the discount rate which should be used to discount future ground water benefits (which reflects
some subjective assessment of the preferences of future generations and weighting of their well-
being) is "handed down" to policy analysts 4 Although ground water policy analysts may be
required to use a certain discount rate, the present value of future ground water benefits can be
calculated using a variety of discount rates to assess the sensitivity of present-value calculations
to the choice of a discount rate Sensitivity analyses should not be used to identify a desired
outcome, but to examine the effects of a number of plausible discount rates
Concerns over the effects of current policy decisions on future generations intensify
when suspected irreversibihties are present For example, suppose a particular aquifer is
threatened by contamination, purification of the aquifer would be extremely costly and natural
filtration may take decades or longer Also, suppose that the aquifer is not currently a significant
source of water for human use However, there is a chance, because of population growth, that
the aquifer may become a major source of water for humans in the future The uncertainty of
future population growth combined with the discounting process may result in very low weights
being placed on the possible future benefits of protecting the aquifer from contamination
Consequently, a policy to protect the aquifer from contamination may not pass a standard
benefit-cost test
" Benefit estimates are based on the preferences of the current generation and the choice of a discount rate is based
on the preferences of the current generation Benefit-cost analyses, therefore, contain the implicit assumption that
preferences do not change over time Special concern for future generations
bequest motivations perhaps, are included in the benefit assessment
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Whether or not these costs should be borne by future generations is largely a normative
issue The flip-side of the issue is that protecting the aquifer from contamination may impose
major costs on the current generation Paying these costs may reduce the well-being of the
present generation, and could end up having little or no effect on future generations if future
demand for water from the protected aquifer never materializes
When uncertainty and irreversibility are major issues and benefits to future generations
are of concern, the costs to the present generation of protecting ground water should be
considered but may not comprise the definitive decision cntena Although the economics of a
safe minimum standard (Bishop, 1993) for resource protection are not clear (Ready and Bishop,
1991), decision makers may still want to consider protecting selected ground water resources if
the costs to the present generation are not unreasonably high In such cases, ground water
managers may want to develop several policy scenarios for protecting ground water resources
and then investigate the cost effectiveness of accomplishing the protection programs The
question remains whether the protection costs are unreasonably high since benefits no longer
play a central role9 This again Js a normative decision which must eventually be made at some
administrative level
III. PREVIOUS GROUND WATER VALUATION STUDIES
Although we acknowledge service flows of ground water received by both private
individuals and commercial interests, our exposition in this section focuses on ground water
values held by individuals The parameters of ground water valuations differ between
applications to consumers and commercial interests, but we do not loose generality regarding the
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complexity of commodity specification by considering one group of users Previous ground
water valuation studies have used contingent valuation (Boyle, 1994, Boyle et aj , 1994) avoided
costs (Raucher, 1986) or avoidance expenditures (Abdalla et
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also Powell and Allee, 1991) Caudill (1992) estimated the benefits of protecting groundwater
in Michigan (see also Caudill and Hoehn, 1992) McClelland et al (1992) estimated the national
benefits of cleaning ground water contaminated by landfills Jordan and Elnagheeb (1993), like
Sun, estimated the benefits of protecting ground water so that contamination levels would be
below health advisory levels, but for the entire state of Georgia Finally, Poe (1993) estimated
the benefits of protecting ground water so contamination levels would not exceed health
advisory levels in Portage County, Wisconsin In Table 3 we cite the most recent study first and
then work backwards listing studies in reverse chronological order
Despite their small number, these ground water valuation studies present a wide variety
of applications In the geographical dimension, for example, the applications range from
individual communities (Powell, 1991, Shultz, 1989, and Edwards, 1988) to counties (Poe, 1992
and Sun, 1990) to states (Jordan and Elnagheeb, 1993, Caudill, 1992) to national estimates
(McClelland et al, 1992) This diversity presents both advantages and disadvantages The
advantage is available value estimates potentially reflect a variety of ground water conditions at
the study sites that enhance the potential for these studies to collectively provide the value data
necessary for accomplishing a RIA The disadvantage is there is very little depth to the value
data pertaining to specific attributes of ground water conditions
All eight studies focus on quality dimensions of the "stock" function of ground water
This focus is an artifact of the studies being primarily designed to value ground water as a source
of drinking water Although changes in the quality of ground water can affect the quality of
surface waters, we suspect hydrologic data were not available to make these connections All of
the studies, except McClelland et al (1992), employ the implicit assumption that the stock of
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ground water is currently sufficient to meet demand, but the quality of supply is threatened by
contamination McClelland et al ask their survey respondents to assume that contamination will
result m a shortfall of potable water
In Table 3 we consider the condition of ground water in each of the study areas before
presenting the studies' baseline and reference ground water commodity specifications Four of
the studies have information that indicates ground water in the study areas is contaminated (Poe,
1992, Caudill, 1992, McClelland, 1992, and Powell, 1991), and the other four implicitly assume
the current condition is uncontammated, or at least is below health advisory standards The
question marks beside the entries for these latter four indicate that we are unsure what survey
respondents assumed regarding the current groundwater conditions when answering the
valuation questions Poe (1993) established contamination levels by mailing respondents water
testing kits with which water samples were submitted for analysis McClelland et al (1992)
asked respondents about their knowledge of ground water contamination in their community and
selected one subsample in a location with a history of contamination Powell (1991) selected
communities for study based on whether they had a history of ground water contamination
Three studies considered nitrate contamination (Poe, 1992, Jordan and Elnagheeb, 1993,
and Edwards, 1988), while two studies considered concurrent nitrate and pesticide contamination
(Caudill, 1992, Sun, 1990), one study considered chemical and diesel fuel contamination
(Powell, 1991), and the type of contaminates were not specified in the McClelland et al (1992)
study Respondents to the McClelland et al (1992) survey were told contamination was from a
landfill We presume respondents employed subjective perceptions as to what contaminants
were leaching into ground water
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Table 3. Ground Water Condition in Study Areas
Authors
(Publication Dates)
Poe(1993)
Jordan and Elnagheeb
(1993)
Caudill(1992),
Caudill and Hoehn
(1992)
McClelland et al
(1992)
Powell (1991), Powell
and Alice (19??)
Sun (1990)
Shultz(1989)
Edwards (1988)
Current Condition
18% of wells have nitrates in
excess of safety standard
•Safe (?)
•87% to 50% of wells above
standards
•From Version A of survey
-56% knew of ground water
contamination in
community
-13% said community draws
water from contaminated
wells or wells in danger of
contamination
•7 communities experienced
contamination in past 10 years
•8 communities had no history
of contamination
•Safe (?)
•Safe (?)
•Safe (?)
Type of Contamination
•Nitrates
•Nitrates
•Nitrates and
pesticides
•Not specified
•Tnchlorethylene in
6 counties— MA
(2), NY (2), PA (2)
•Diesel fuel-NY
(1)
•Agricultural
fertilizers (nitrates)
and pesticides
•Not specified
•Nitrates
Source of Drinking Water
• 100% private wells (Question 1 in survey to
screen out individuals on public supply)
•78% public systems
• 11% private wells
•43% of Michigan's households rely on
ground water
•From Version A of survey
-51% said part of all of household's water comes
from ground water
• 1 8% private wells
•82% public water supply
-communities draw water supply from
ground water
-percent of community on public supply ranges
from 0% to 100%
•Nearly 100% private wells
• 100% private wells
•89% public systems
-communities draw water supply from
ground water
• 1 1 % private wells
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Table 4 outlines the commodity descriptions used in each of the studies, and it is these
descriptions that form the link between the physical data on ground water conditions at study
sites, as discussed in Figure 1, and service flows provided by ground water within each study
area (Tables 1 and 2) It is important to note that most of the studies asked respondents to
evaluate more than one scenario of ground water contamination In the discussion here we focus
on selected scenarios that give the flavor of the commodity descriptions employed in the studies
Having previously discussed the current ground water condition in the study areas, as
presented in study publications, it is interesting to note the reference ("without policy") condition
respondents were asked to assume when answering the contingent-valuation questions Poe
(1993), Jordan and Elnagheeb (1993) and McClelland (1992) provided information in the survey
questionnaire which objectively defined the reference condition of drinking water services
Powell (1991), Sun (1990) and Edwards (1988) measured respondents' subjective perceptions of
the reference condition of drinking water services in the study areas In these studies, the
investigators appear to have made a conscious decision to conduct the valuations based on
respondents subjective perceptions of the reference condition Caudill (1992) and Shultz (1989)
did not establish either an objective or subjective reference conditions for their valuation
exercises
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Table 4. Information Presented on Ground Water Commodity (Change in Services)
Author(s)
(Publication dates)
Poe (1993)
Jordan and Elnagheeb
(1993)
McClelland et al
(1992)
Caudill (1992)
Powell (1991)
Sun (1990)
Shultz (1989)
Edwards (1988)
Reference Condition
• Stage I - respondents told
1 8% of wells above health
standard
• Stage II - well-specific test
results provide
• Asked to assume level of
nitrates exceed safety
standard
• Asked to assume 40% of
supply from
ground water is
contaminated
• Subjective perceptions
measured
• Respondents subjective
rating of ground water
condition (unsafe,
somewhat safe, safe, or very
safe)
• Subjective perceptions
measured
• Not specified objectively
or subjectively
• Subjective perceptions
measured
Subsequent Condition
• Below health standards
• Reduce levels to below safety
standard
• Complete cleanup
• Well water - eliminate health
threat
• Very Safe - "I feel
absolutely secure I have
no worries about the
safety of the community
water supply at present I
am certain the level of
protection is excellent and I
cannot foresee any
contamination occurring in
the future "
• Protect so below EPA
health advisory levels for
pesticides and fertilizers
• Reduce potential of
contamination (increment
not specified)
• Future contamination -in
5, 10, 20, or 40 years
-0%, 25%, 50%, 75% or
100% probability of
contamination
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All eight studies specified the subsequent ("with policy") condition of services Each
study took a different approach to describing the change in services to be valued as defined by
equation 1, some providing more complete definitions than others Poe offered the most
complete commodity definition Poe conducted his study in two stages In the first stage
respondents water was tested for contaminants In the second stage the well-specific test results
were used to set the reference condition and the subsequent condition was below health
standards In contrast, Powell's respondents rated current conditions on a four point scale,
ranging from "unsafe" to "very safe" In the valuation exercise, respondents' subjective rating of
the current condition of drinking water services became the reference condition, and then stated
a value for an increase in water quality to a rating of "very safe" This approach allowed
respondents to translate the information presented and frame their own commodity definitions
when responding to the contingent-valuation questions
Studies attempting to completely (Poe, 1992, Jordan and Elnagheeb, 1993, and
McClelland, 1992) or partially (Sun, 1990, Schultz, 1989, and Edwards, 1988) frame the change
in ground water services have both strengths and weakness The strength of completely
specifying commodity descriptions is experimentally induced bias and variation in valuation
responses may be reduced The disadvantage is respondents may reject the objective
information resulting in valuation responses that are based on subjective perceptions (Kask and
Maam, 1992, and Lichtenstem, et aj, 1978)6 The Powell study meets this hurdle head on, but
* The possibility of subjective editing of information points out the desirability of eliciting information about
respondents' subjective assessments of the ground water valuation scenario so that these subjective assessments (e g ,
subjective risk assessments) can be incorporated into value estimation, interpretation and application
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also raises questions For instance, how can value estimates, based on subjective perceptions, be
linked to actual changes in ground water conditions9 These are fundamental issues m any
environmental commodity valuation study These questions must be addressed if ground water
value estimates are to be useful for public-policy analyses
A basic insight from this overview is that the library of ground water valuation studies
measuring individual values is very thin in terms of the number of studies, and consequently, in
terms of values for specific dimensions of ground water For example, all eight studies account
for only the direct provision of dnnkmg water service (service row 1, Table 1) This implies a
need for more primary data on values for other ground water services if the library of ground
water value studies is going to be sufficient for RIAs (and other policy needs) Original
valuation studies are needed for all of the potential service/effect flows of ground water
identified in Tables 1 and 2
Another basic insight from this overview is that to be useful for policy assessment,
valuation studies must be very detailed and complete For example, following the valuation
framework summarized by Figure 1 and Tables 1 and 2, the basic ground water information
required for policy analysis is changes in ground water service flows Assessment of this change
requires knowledge of the current (baseline), reference, and subsequent ground water conditions
In general, the descriptions of the current, reference, and subsequent ground water conditions are
quite vague in the eight studies This vagueness makes it difficult to establish the linkages
between changes in ground water policies, ground water conditions, services provided, and
estimated values Of particular concern is the difficulty of ascertaining how the value estimates
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correspond to actual biophysical changes in ground water resources and the resulting change in
service flows
If valuation studies do not provide sufficient information for establishing the technical
linkages illustrated in Figure 1 and Tables 1 and 2, the usefulness of valuation estimates for
policy assessment is greatly reduced Valuation studies need to measure values for changes in
service flows that have clear linkages to biophysical changes in ground water resources To
complete the policy assessment process, clear linkages must also be established between changes
in ground water policies and biophysical changes m ground water resources Improvements are
needed in the assessments conducted by physical scientists and economists, and these
investigations need to work to enhance the interfaces between these analyses The difficulties
encountered when assessing changes in ground water policies are further illustrated by
considering two policy assessment case studies in the next section
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IV. GROUND WATER VALUATION AND REGULATORY IMPACT ANALYSES
U S Presidential Executive Order 12866 issued in 1994 instructs government agencies to
conduct regulatory impact analyses (RIAs) on all major regulations RIAs are to include
assessments of the benefits and costs of the full range of effects associated with a proposed
regulation (USEPA, 1991) The full range of effects includes benefits and costs which can be
quantified monetarily, and those which cannot be quantified monetarily 7 The RIA guidelines
were developed for evaluating any type of environmental regulation, e g, air, surface water or
ground water Our focus is specifically on ground water In the remainder of this section we
will review two RIAs that dealt with ground water resources while complying with the overall
RIA guidelines Our general process for evaluating these RIAs is to consider how the benefit
assessment components correspond to the framework we have proposed in this report
Draft Class V Injection Well Regulatory Impact Analysis
The purpose of this RIA was to consider the benefits of regulating Class V industrial
wells Four types of industrial facilities operating Class V injection wells were considered as
case studies automotive repair, dry cleaning, metal fabrication and electroplating Within each
industry actual pollution incidents or events were considered
Class V injection wells represent a case where groundwater is used as a medium to
dispose of wastes (Row 10 in Table 1) In the current RIA, disposal is presumed to pose a
human health threat so injections of waste are being proposed for regulation
7 Although our focus is on potential benefits, the discussion also provides insight on potential
costs of a proposed regulation since social costs are often foregone benefits (or opportunity
costs)
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Within the empirical section of this RIA, Chapter 4, a very specific perspective is taken
regarding benefits Detailed breakdowns of contaminants and contaminant concentrations were
developed for the RIA No discussion of the dispersion of the contaminants were provided and
explicit consideration was not given to the multifaceted ground water services documented in
Tables 1 and 2 Only human health risks were quantified, the quality component of Row 1 m
Table 1 Although a larger domain of benefits may have been considered for inclusion in the
analysis, we could not discern this from the available documentation
Benefits were computed using breakeven analyses (contaminant concentration resulting
in zero net benefits) and an averting behavior approach (avoidance cost) Health benefits for the
breakeven analysis were computed using the number of statistical lives saved and a range of
values from the literature were employed Uncertainty was considered in the analyses by
considering the expected efficiency of proposed regulations Avoidance costs were based on the
most cost efficient response to the contamination events and uncertainty was factored in by
considering the probability that contamination would go undetected Both of these approaches
are likely to give minimum estimates of value because they do not reveal the public's maximum
willingness to pay to avoid contaminated ground water
The primary questions that arise when the analyses for this RIA are compared to the
ground water valuation framework in Section II are
• Were important benefit categories omitted9
• Were benefits of reducing health risks underestimated9
These issues may not be relevant for the RIA, but the available documentation does not allow us
to answer these questions
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Draft RIA for Final Rulemakmg on Corrective Action for Solid Waste Management
Units
The purpose of this RIA was to present methodology to be used to estimate costs and
benefits of site cleanup at hazardous waste facilities regulated under the Resource Conservation
and Recovery Act An application is included to provide an illustration of the methodology We
concentrate our discussion on the benefits component of the application
Referring back to Figure 1, the RIA clearly defined the reference and subsequent ground
water conditions and projected these conditions through time as we recommend in Section II
This work was done through interactions of environmental scientists, economists and engineers,
an approach we also advocate to provide policy relevant value estimates Notably, the RIA
focus on the quality of ground water, thus ground water services listed m rows five through nine
of Table 1 can be reasonably excluded because the physical stock of ground water would not
appear to be affected by the action being evaluated
The types of values estimated include human health benefits, ecological benefits, and
nonuse values Health benefits from protecting ground water arose from reducing three paths of
exposure ingesting contaminated drinking water, inhaling volatile compounds during household
use of ground water, dermal uptake while showering The pathways of contamination arise from
drinking ground water and household uses of ground water (first row of Table 1) From the
information provided in the RIA we can not discern whether other indirect pathways of human
health effects, (rows two through four in Table 1) were not considered or were deemed to be
minor or were not relevant
The averted water use applied the cost of water treatment as a proxy for benefits, likely
yielding an underestimate of benefits in this category This component measures the access
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value of potable drinking water in Row 1 of Table 1 No mention is made of averting costs for
commercial users of ground water, (rows two through seven of Table 1) If commercial users
denve their water from municipal sources, then the benefits accruing to these users may have
been counted If commercial users derive ground water from private wells and invest in
purification, benefits in this category are underestimated
National nonuse benefits were estimated, addressing Row 12 of Table 1 Nonuse
benefits were not estimated for the function of ground water discharging to surface water For
each of the benefit categories listed m Tables 1 and 2, data were developed for specific
contamination sites The RIA does not discuss how national averages of nonuse values should,
or can, be adjusted for application to corrective actions at specific sites
The property value analysis considered the effects on residential property values located
near solid waste facilities Although this is a valid method for estimating ground water values,
property value effects may result m double counting with the use value measures Precisely, is
there double counting with the averted-cost and hedonic-price measures of benefits7 Since an
mtegrative framework for the various benefit components is not given and the component value
estimates are implicitly assumed to be additive, it is difficult to ascertain if double-counting of
benefits occurred
The solid waste corrective action RIA appears to be consistent with the ground water
valuation framework we proposed in Section II Despite the general consistency of the
approaches, issues that arise when comparing the RIA with our proposed ground water valuation
framework are
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41
• Were some of the indirect effects of contaminated ground water inadvertently
overlooked, e g , health effects other than household consumption?
• Were use benefits underestimated due to use of averting expenditures and not
considering commercial users of ground water7
* Does the lack of a conceptual framework for integrating the various benefits
estimates lead to double counting of some benefit components9
As noted for the previous RIA, these issues do not necessarily imply problems in the RIA, but do
imply an expanded scope of benefits needs to be considered in the design and reporting of RIAs
Summing Up
The solid waste RIA appears to be much closer to the ground water valuation framework
in Section II than is the injection well RIA This difference may be due to reporting or the
injection well RIA may indeed have taken too narrow of a scope when considering potential
benefits of the action Given the applications, we ask whether important benefit categones were
omitted in both RIAs and whether values may have been underestimated for benefit categones
considered Both of these issues, if present, will lead to under estimates of total benefits vis a vis
total costs of the implementing the regulations No information is reported regarding what
components of values were considered, but not analyzed for the RIAs
The injection well RIA explicitly considered uncertainty and did implicit sensitivity
analyses by considering different levels of regulation No comparable analyses were reported
for the solid waste RIA Given the complexity of ground water resources and services,
uncertainties regarding ground water conditions, and difficulties in measuring benefit categones,
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42
we strongly urge that all ground water RIAs should consider potential sources of uncertainty and
conduct sensitivity analyses to investigate the robustness of assumptions employed in analyses
Finally, neither analysis even opened the door for considerations of mtergenerational
equity issues Although this is a very difficult issue, which we did not attempt to solve in
Section II, consideration should be given to the fact that all benefits and costs arise from the
preferences of the current generation given available technology Simultaneously, either
implementing or not implementing ground water policies can have substantial implications for
ground water resources available to future generations
There are several key points to consider when addressing the issues raised in our
overview of the two RIAs and developing systematic ground water evaluations for future RIAs
and other policy assessments These key points are illustrated by our valuation framework
summarized in Figure 1 and Tables 1 and 2 An RIA must first assess the biophysical condition
of a ground water resource "with" and "without" the proposed policy change It appears that the
RIA addressed effects where biophysical data were available and did not report potential effects
that could not be documented with available technology or data More research is needed to
develop data bases and models to assess the effects of ground water policies on biophysical
changes m ground water resources (Boxes 1-7 in Figure 1) The next issue faced in conducting
an RIA is to identify how the policy-induced changes in the biophysical condition of a ground
water resource will change ground water service flows (Box 8, Figure 1) The two RIAs we
reviewed only accounted for a portion of the service flows suggested in Tables 1 and 2 Future
RIAs should identify potentially affected service flows that were considered and dismissed
because no effect was identified, or the identified effect was quite small, or there was no data to
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43
quantify the effects Both RIAs used several valuation methodologies (e g , averting behavior,
contingent valuation, hedonic price), but are weak because value estimates can not be clearly
linked to specific biophysical changes in the ground water resources The application of
economic value estimates in RIAs can be improved by precisely defining changes in ground
water service flows in terms that are relevant for economic analysis (using Figure 1, and Table 1
and 2 as a guide)
V A STRUCTURE FOR CONSIDERING THE VALUE OF GROUND WATER
In this section, we discuss a general process or protocol for EPA offices to follow when
incorporating the economic value of ground water in RIAs The overall goal of this protocol is
to generate and apply economic value estimates consistently across policy issues and offices
within EPA Our valuation framework begins to develop the protocol for this consistency In
addition, following the protocol may help EPA Offices to avoid duplication of efforts and
potential double-counting of values For example, concise summaries of previous RIAs would
be available enabling future RIAs to explicitly build on the knowledge developed and experience
gained in conducting previous RIAs This effort may be particularly fruitful for transferring
knowledge and information through time, across policy issues within EPA Offices, and across
offices within EPA
Another useful application of our protocol is that it will provide information for building
EPA's Regulatory Impact Analysis (RIA) Benefit-Cost Database Our protocol is different from
the RIA Benefit-Cost Database in that it provides guidelines for conducting and reporting benefit
assessments in RIAs The RIA Benefit-Cost Database is a general reporting of all information
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44
contained m RIAs It probably is not practical to include all of the detailed information about
procedures used to assess ground water values in the RIA Benefit-Cost Database We
recommend, however, that all of the information generated by our protocol be available to
supplement the RIA Benefit-Cost Database, and the Database include information about where
more detailed information regarding valuation procedures can be obtained
Protocol Components
The first component of our protocol is for the RIA analyst to record answers to the
following important questions
Name of Proposed action9.
What is the current ground water condition7
Contaminated —>
What are the contaminants?
Geographic
Contaminant Concentration Extent
Uncontammated —>
What are the potential
contaminants?
Geographic
Contaminant Concentration
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Unknown
45
What is the proposed action7
Protection —>
Remediation —>
What are the proposed policies or rules
What are the proposed policies or rules?
What are the sources of contamination9
Known —>
List of sources:
Source Contaminant
Unknown
What would the ground water condition be over the study time frame without any action
(reference condition)9
Quantity Quality
Year 1
Year 2
Year 3
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46
Etc
What would the ground water condition be over the study period with action (subsequent
condition)9
Quantity Quality
Yearl
Year 2
Year3
Etc
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47
Answers to these questions relate to Boxes 1 - 7 in Figure 1 and comprise the technical data
necessary for estimation of benefits, Boxes 8-9
The next component of the protocol is to identify affected services that give rise to
benefit estimates This issue relates to both the stock and surface water discharge functions
(Tables 1 and 2) Assessment of potential changes in services can be facilitated by completing
matrices such as those shown m Tables 5 and 6 These tables are partially filled out for a
hypothetical regulation The first step in completing the tables is to assess the reference
condition for the services listed under each function in Tables 1 and 2 For example, affected
services for the stock function are documented in Table 5 The "Reference Conditions" indicate
that the aquifer provides an adequate supply of drinking water through public or private wells
and is uncontammated These quantity and quality dimensions are known with certainty The
aquifer is not directly utilized for crop irrigation, livestock watering, or food processing services,
as indicated by the "no" entries in the second column of Table 5 To clarify interpretation of the
table all other entries for these services are left blank Thus, the body of the table only
documents affected services Completing the first column indicates that a service was
considered and purposely excluded The information in the first column also briefly notes why a
potential service is excluded
The entries for the discharge function in Table 6 indicate that the aquifer indirectly
provides water for crop irrigation and livestock watering, but surface water is not used for
human consumption Again, quantity is assumed to be adequate, but the quality is threatened by
contaminated ground water The extent and timing of the potential contamination is unknown
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Table 5 Changes in Ground Water Services - Stock Function
Service
Drinking
Water
Crop
Irrigation
Livestock
Watering
Food
Product
Processing
etc
Reference Conditions
Affected by
Proposed
Rule
(if no,
why*?)
Yes
No
(No known
or antici-
pated use)
No
(No known
or antici-
pated use)
No
(No known
or antici-
pated use)
Quantity
Adequate
for
Current
Demand
Quality
Contam-
ination
None
Concen-
tration
N/A
Uncertainty
None
Subsequent Conditions
Quantity
Increase
Decrease
No
Change
X
Quality
Increase
Decrease
Potential
Decrease
No
Change
Uncertainty
Extent and
timing of
contam-
ination
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Table 6 Changes in Ground Water Services - Discharge Function
Service
Drinking
Water
Crop
Irrigation
Livestock
Watering
Food
Product
Processing
etc
Reference Conditions
Affected
by
Proposed
Rule
(If no,
why7)
No
(No
known or
antici-
pated use)
Yes
Yes
No
Quantity
Adequate
for
current
demand
Adequate
for
current
demand
Quality
Contam-
ination
None
None
Concent-
ration
N/A
N/A
Uncertainty
None
None
Subsequent Conditions
Quantity
Increase
Decrease
No
Change
X
X
Quality
Increase
Decrease
Potential
Decrease
Potential
Decrease
No
Change
Uncertainty
Extent and
timing of
contam-
ination
Extent and
timing of
contam-
ination
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A starting point for assigning monetary values to changes in ground water services is an
assessment of available valuation data, e g, the studies reported in Table 3 Available value
estimates would be graded as to their suitability for transfer to the current ground water
valuation issue For discussions of criteria for selecting value estimates see the special issue of
Water Resources Research (Vol 28, No 3, 1992) dealing with benefits transfer We do not
envision this process as being purely qualitative (e g , good, average or poor), but dealing with
specific issues of how the available value estimates relate to the current situation being evaluated
in the RIA at hand For example, are the same contaminants involved7 Are the magnitudes of
contamination comparable9 Were the valuation studies conducted adequately, e g , are estimates
biased or have large variances7
As an example, suppose there is a potential decrease in the quality of drinking water
provided directly by the aquifer This change is represented by an increase in the concentration
of Chemical Z of 30 ppb As indicated in Table 7a, the proposed regulation will not affect the
quantity of ground water available for human consumption, and the aquifer is not directly used
for the other services listed in Table 5 The "Increment Evaluated" under "Quantity Changes" is
listed as "no effect" m Table 7a The value columns for the quantity change, therefore, are left
blank to facilitate interpretation of the table The increment of contamination to be evaluated is
documented under the"Quahty Changes" heading in Table 7a We assume that the water can be
made safe for drinking, but expenditures must be made on water purification For our
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51
hypothetical example we assume value data are not available to assign initial values to the
reduction in quality 8
Table 7a Available Data for Valuing Changes in Ground Water Service* - Stock Function
Services
Drinking
Water
Crop
Irrigation
Livestock
Watering
Food
Product
Processing
Etc
Quantity Changes
Increment
Evaluated
No effect
No effect
No effect
No effect
Value
Estimate(s)
Valuation
Method
Quality Changes
Increment
Evaluated
30ppb
Reduction
No effect
No effect
No effect
Value
Estimate(s)
None Available
Valuation
Method
N/A
After assessing available data, additional data needs are identified This covers services for
which available value estimates are not appropriate and services for which value estimates do not exist
Continuing with the example, value estimates are only needed for a reduction in water quality for
8 A number of Meta analyses of environmental values are being developed These studies
could, if developed for ground water valuation (Boyle et al, 1994), can be a source of initial
value estimates for RIAs (Smith and Huang, 1993, Smith and Kaoru, 1990, Smith and Osborne,
1993, and Walsh et al, 1988)
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52
human consumption under the stock function We identify averting cost as a minimum estimate and
contingent valuation as a procedure for estimating the full value the public places on avoiding potential
contamination Values included in contingent valuation estimates, but excluded from averting costs,
include disutility from having to invest and maintain filtering systems for private wells and potential
nonuse values The question mark in Table 7b indicates that the values remain to be estimated After
the study is completed, the question mark would be replaced by the estimate(s)
Tables similar to 7a and 7b can be developed for the ground water recharge We omit this step
here for expositional convenience
The final step is to identify services that will not be monetized including the reasons for not
monetizing them (Table 8) In this simplistic example, we assume a 50% chance of a 30 ppb level of
contamination We further assume that all effects are monetonzed The expected change can be
monetonzed in some instances using appropriate measures of economic value under uncertainty (e g ,
option price described previously)
Table 7b Needed Data for Valuing Changes in Ground Water Services - Stock Function
Service
Drinking
Water
Crop
Irrigation
Livestock
Watering
Food
Product
Processing
Quantity Changes
Increment
Evaluated
No effect
No effect
No effect
No effect
Desired
Valuation
Method
Value
Estimates
Quality Changes
Increment
Evaluated
30 ppb
Reduction
No effect
No effect
No effect
Desired
Valuation
Method
Contingent
valuation or
averted cost
Value
Estimates
9
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53
Table 8 Other Valuation Considerations for Changes in Ground Water Services - Stock Function
Services
Drinking Water
Crop Irrigation
Livestock Watering
Food Product Processing
Nonmonetonzed Effects
(Reason Why)
None
None
None
None
Treatment of Uncertainty
50% chanct of
contamination
Sensitivity Analyses
Geographical extent of
contamination
However, in some cases this will not be possible In such instances, sensitivity analyses conducted
with plausible value estimates can be utilized to consider the effect of the uncertainty on the outcome of
the entire benefit-cost or cost-effectiveness analysis Another source of uncertainty in the current
example is the geographical extent of the contamination It is assumed that this factor is not known and
can not be accurately predicted Thus, several scenarios of damages might be investigated to consider
the impact on aggregate value estimates
VI. CONCLUDING COMMENTS
Preparing an RIA that adequately considers the full range of effects of a proposed ground water
regulation is a major undertaking Benefit estimation can be facilitated by carefully identifying,
measuring, and documenting the linkages and "chain of events" shown in Figure 1, using Tables 1 and 2
as guides for tracing specific linkages between policies, changes in ground water services and value
estimates These tables guide identification and quantification of linkages between a proposed
regulation, changes in services provided by ground water functions, and the effects of service changes
on economic activities and values This information reveals the gainers and losers of a proposed
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54
regulation, over both time and geographic space Using Table 5, 6, 7a, 7b and 8 will facilitate clear and
concise documentation of valuation analyses for RIAs This documentation will report service effects
valued as well as those dismissed as not relevant It will also insure all RIAs considering ground water
values begin at the same starting point, consider the same issues and provide uniform reporting
Establishing structure and consistency within and across EPA offices is important for producing
accurate benefit estimates, avoiding double-counting problems, and eliminating duplication of ground
water valuation efforts
We envision these tables as comprising a concise form for reporting all benefit analyses
conducted for RIAs The list of questions would comprise a cover sheet to identify the RIA and ground
water issue Each of the tables would then follow to complete the documentation This reporting
framework would provide a systematic way of documenting and reviewing RIA benefit analyses It
may also be helpful to document studies used as secondary sources of value data as has been done by
Boyle (1994) for ground water contingent-valuation studies, and we abbreviated in Tables 3 and 4
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