e^ - r f - R-
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EPA 230-6^95-005
A FRAMEWORK FOR MEASURING THE ECONOMIC
BENEFITS OF GROUND WATER
OCTOBER 1995
This report is the product of the EPA Interoffice Ground Water Valuation Workgroup that
included two economists from outside the Agency. Workgroup members are identified on the
following page.
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EPA Interoffice Ground Water Valuation Workgroup Members
Kevin J. Boyle, Department of Resosurce Economics and Policy, University of Maine
John C. Bergstrom, Department of Agricultural and Applied Economics, University of Georgia
Charles Job, Office of Ground Water and Drinking Water (Workgroup Chair)
Mary Jo Kealy, Office of Policy, Planning and Evaluation
Ron Bergman, Office of Ground Water and Drinking Water
Rodges Ankrah, Office of Policy Analysis
Ghulum A15, Office of Pesticide Programs
Jihad Alsadek, Office of Pesticide Programs
Gary Ballard, Office of Solid Waste
Vivian Daub, Office of Water
Jacolyn Dziuban, Office of Radiation Programs
Richard 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 4
Defining Ground Water Values 6
Ground Water Functions 9
Ground Water Services 19
Effects of Changes in Ground Water Services 20
Measuring Economic Values 21
Aggregation Issues 24
Uncertainty in Ground Water Valuation 25
Intergenerational Issues 26
Previous Ground Water Valuation Studies 29
Ground Water Valuation and Regulatory Impact Analyses 39
Draft Class V Injection Well Regulatory Impact Analysis 39
Draft RIA for Final Rulemaking on Corrective Action for Solid Waste
Management Units 41
Summing Up 43
A Structure for Considering the Value of Ground Water 45
Protocol Components 46
Concluding Comments 55
References Cited 57
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List of Tables
Table 1. FUNCTION: STORAGE OF WATER RESERVE (STOCK) 11
Table 2. FUNCTION: DISCHARGE TO STREAMS/LAKES/WETLANDS 14
Table 3. Ground Water Conditions in Study Areas 31
Table 4. Information Presented on Ground Water Commodity
(Change in Services) 35
Table 5. Changes in Ground Water Services - Stock Function 50
Table 6. Changes in Ground Water Services - Discharge Function 51
Table 7a. Available Data for Valuing Changes in Ground Water Services - Stock
Function 53
Table 7b. Needed Data for Valuing Changes in Ground Water Services - Stock
Function 54
Table 8. Other Valuation Considerations for Changes in Ground Water
Services - Stock Function 55
List of Figures
Figure 1 7
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I. INTRODUCTION
The primary goal of this project 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).1
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 valuing 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 research were to:
1. Develop a conceptual framework that describes the steps in identifying and
measuring the economic value of ground water.
2. Identify responsibilities within each office of EPA and link these responsibilities to
the valuation framework;
3. 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
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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4. Provide guidelines for utilizing the valuation framework to consistently value
ground water across EPA offices and policy issues within offices.
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
in physical characteristics of ground water to uses (services) provided by ground water
and the economic effects of changes in ground water services. It is the link between
changes in the physical condition of ground water and the resulting changes in (effects
on) services that provides the changes in values that are necessary for conducting RIAs.
The basic valuation framework reported here was developed in conjunction with the
Ground Water Valuation Group in which we participated, chaired by Charles Job of the
Office of Ground Water and Drinking Water.
After meeting with representatives of the various offices within EPA, it became
clear that each office did not have a clear mandate, at least as perceived by the
representatives to whom we talked, regarding the treatment of specific types of ground
water values in RIAs conducted by their offices. Rather, they viewed their mandates as
requiring them to address all potential resource effects when conducting RIAs. If ground
water was an affected resource, then any changes in the condition of ground water would
be taken into consideration. Given this outcome, it was not possible for us to develop
Jinks between responsibilities of various offices within EPA and the conceptual
framework for valuing ground water. In hindsight this outcome is not entirely
unexpected. Each office addresses policy issues relevant to their mission, but issues
within any office can have dimensions that affect the condition of ground water
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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 can have implications for ground water. Thus, there is not necessarily a
direct link between specific attributes of ground water valuation and the missions of the
various offices within EPA. Having a consistent blue print for ground water valuation,
however, can help each office's assessments of ground water values, and can help to
insure 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 is
the issue unique to ground water applications.
It was decided as part of the development of this report that the link to RIAs
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 by
the contract administrators that the selected RIAs present the most comprehensive
evaluations of ground water conducted by EPA for RIAs. The RIAs examined are the
"Class V Injection Well Regulatory Impact Analysis and Regulatory Flexibility Analysis"
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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 guidelines for EPA to use as a starting
point 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 research project or empirical analysis 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
investigator(s) and to a large extent determine the outcome of the investigation. In an
original study these decisions are important in terms of deciding what attributes of a
ground water resource are to be valued and ultimately defines the uses to which the
resulting value estimates can be applied in the policy process. In the case of benefits
transfer, where values estimates are taken from existing studies, analysts' decisions are
crucial in terms of defining the valuation issue at the "policy site" where value estimates
are to be transferred and interpreting value estimates from available "study sites" where
empirical estimates of value already exist.
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.
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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 diminishment 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 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 in
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 transferabiJity, 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
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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 (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° - Ql) (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
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FIGURE 1
AQUIFER MONITORING
i
CURRENT QUANTITY AND QUALITY
/ N
ASSESSMENT OF FACTORS
AFFECTING QUANTITY AND
QUALITY "WITHOUT POIJCY*
ASSESSMENT OF FACTORS
AFFECTING QUANTITY AND
OUA1JTY "WITH POLICY"
I
REFERENCE WATER QUANTITY (X°)
AND QUALITY (Q°)
SUBSEQUENT WATER QUANTITY (X1)
AND QUALITY (Q1)
CHANGE IN WATER QUANTITY AND QUALITY
(X* - X1, Q° - Q1)
I
8
CHANGE IN GROUNDWATER SERVICES
S° = f(X°, Q°|Sg) TO Sl = f(XS
i
ECONOMIC VALUE (BENEFITS)
V=g(AS|S£), WIIKRE AS=S°-S1
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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.
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 in
service flows which affect economic activities. We can then estimate economic value
(e.g., willingness-to-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 comes 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
2We use the term "biophysical" to indicate biological, ecological, hydrologic, chemical, and other physical
factors.
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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.
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 1. FUNCTION: STORAGE OF WATER RESERVE (STOCK). Ground water stored In an aqulf.r provides reserve
(stock) of water which can be directly used to generate services. Potential service (lows 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 Healed Water
for Geoihermal Power Plants
Provision of Cooling Water
for Oiher 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 Cosi of Electricily
Generation
Change in Cost of Maintaining
Public or Private Property
Change in Cost of Maintaining
Public or Private Property
Change in Human Heallh 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 Economic Outpul
Attributable to Use of Ground water
Resource ax "Sink" for Wastes
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
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
Benefits Transfer
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
Benefits Transfer
Market Price/Demand Function
Supply or Cos! Function
Consumer/Producer Cost Savings
Contingent Valuation
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic 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 1. Continued
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Provision of Clean Waier
through Support of Living
Organisms
Provision of Passive or Non-
Use Services (e.g.. Existence
or Bequest Motivations)
Change in Human Health or Health
Risks Attributable to Change in
Water Quality
Change in Animal Health or Health
Risks Attributable to Change in
Water Quality
Change in Value of Economic
Output or Productions Costs
Attributable lo Change in
Water Quality
Change in Personal Utility
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic 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
'This (able was developed with the input and assistance of the U.S. EPA Ground Water Valuation Group directed by Charles Job and
Mary Jo Kealy.
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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
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Table 2. FUNCTION: DISCHARGE TO STREAMS/LAKES/WETLANDS. Ground wafer contributes lo the Row or stock of
water in streams, lakes, and wetlands. A portion of surface water and wetlands services are therefore attributable to the
ground water resource. Potential service (lows and effects of these services are listed below.*
SERVICES
EFFECTS
VALUATION
TECHNIQUES
Provision of. Drinking Water
through Surface Water Supplies
Change in Welfare from Increase 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 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 2. Continued
Provision of Walcr 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
Hedonic 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-Producis
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
Hedonic 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, Fishing,
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
Consumer/Producer Cost Savings
Contingent Valuation
Travel Cost Method
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Contingent Valuation
Hedonic 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 She
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
Hedonic Price/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 in Human Health or
Health Risks Attributable to
Change in Water Quality
Change in 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
Hedonic 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
IS
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 in 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
Hedonic Price/Wage
Averting Behavior
Benefits Transfer
Market Price/Demand Function
Supply or Cost Function
Consumer/Producer Cost Savings
Conlingenl 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
Conlingenl Valuation
Benefits Transfer
This table was developed with the input and assistance of the U.S. EPA Ground Water Valuation Group directed by Charles Job and
Mary Jo Kealy.
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18
policy is targeted towards the recharge aquifer and the other is targeted towards land
run-off. 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 is 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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19
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
dnnking 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,
r
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
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mere existence 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 in 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 in human health or health risks requires careful consideration of
such issues as changes in mortality and morbidity, and cancerous and noncancerous
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21
health threats. Identification of the various types of health effects which can result from
changes in ground 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
3 See Boyle and Bishop (1987) for an application of total valuation to valuing
endangered species.
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22
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, 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 Appendix A of the "Guidelines for Performing Regulatory Impact Analysis"
(U.S. EPA, 1983). 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 Kolstad, 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 Marshallian surplus, i.e., income is held constant rather than
utility. We do not intend to imply that estimates of Marshallian surplus are not
appropriate for valuing ground water. Rather, these are not the conceptually desired measures.
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23
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 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 Hicksian 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 a I, 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
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24
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).
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 willingness-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
time (Freeman, Chap. 7, 1993). For a given aquifer, there are likely to be different
market areas associated with each of the services listed in 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,
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25
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 in that time period (X],QJ) and the value of what ground water quantity and
quality would have been without the policy (X?,Q°). That is,
AS, = S|(X|,Ql) - S«(X?,Q!).
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.
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26
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., willingness-to-pay) should reflect this uncertainty. The appropriate welfare
measure is option price (Bishop, 1982; Smith, 1983; Freeman, Chap. 8, 1993). Option
price is defined as a representative individual's maximum willingness-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).
Intergenerational Issues
In many cases, the effects of ground water depletion and contamination may be
long-term in nature, raising concerns related to intergenerational equity and
irreversibility. 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.
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27
Thus, it is sometimes argued that the process of discounting or downweighting 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 in 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 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
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28
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 irreversibilities 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.
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
4 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 only
enter if nonuse values, based on bequest motivations perhaps, arc included in (he benefit assessment.
J
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29
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 criteria.
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 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
role? This again is a normative decision which must eventually be made at some
administrative level.
HI. 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 complexity of commodity specification by considering one group
of users. Previous ground water valuation studies have used contingent valuation (Boyie,
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30
1994; Boyle et al., 1994) avoided costs (Raucher, 1986) or avoidance expenditures
(Abdalla et al, 1992; Abdalla, 1994) to estimate ground water benefits held by individuals.
To illustrate the scope of work involved with defining and measuring ground water
values, we include a review here of the previous ground water studies which used
contingent valuation. When applying contingent valuation to measure ground water
values, it is necessary to explain the change in the condition of ground water (commodity
definition) to survey respondents. The full complexity of the ground water valuation
problem is encountered head-on when attempting to explain the ground water
commodity to survey respondents in contingent valuation studies.
To our knowledge there have been nine contingent-valuation studies of ground
water conducted to date; eight in the United States and one in the United Kingdom. We
discuss the studies conducted in the U.S. (Table 3).5 The first study was conducted by
Edwards (1988) and estimated the benefits of reducing the probability of ground water
contamination in the community of Falmouth, Massachusetts. Shultz (1989) also
estimated the benefits of reducing the probability of ground water contamination, but in
Dover, New Hampshire (see also Schultz and Lindsay, 1990). Sun (1990) estimated the
benefits of protecting ground water in Dougherty County, Georgia such that
contamination levels would be below U.S. EPA health advisory standards (see also Sun et
al., 1992). Powell (1991) evaluated the protection of ground water in 15 communities
located in Massachusetts (four), New York (four) and Pennsylvania (seven) (see also
Powell and Alice, 1991). Caudill (1992) estimated the benefits of protecting ground
See Boyle (1994) for a more complete discussion of these studies.
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32
water 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
i
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
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33
make these connections. All of the studies, except McClelland et ah (1992), employ the
implicit assumption that the stock of 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 in 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 uncontaminated, 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 (Caudilt, 1992; Sun, 1990), one study considered chemical and diesel fuel
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34
contamination (Powell, J991), and the type of contaminates were not specified in the
McClelland et aj. (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.
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
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35
Table 4. Information Presented on Ground Water Commodity (Change in Services)
Author(s)
(Publication dates)
Reference Condition
Subsequent Condition
Poe (1993)
Stage I - respondents
old 18% of wells above
health standard
Stage II - well-specific
test results provide
Below health standards
Jordan and
Elnagheeb (1993)
Asked to assume level
of nitrates exceed safety
standard
Reduce levels to below
safety standard
McClelland et al.
(1992)
Asked to assume 40% of
supply from
ground water and in
contaminated
Complete cleanup
Caudill (1992)
Subjective perceptions
measured
Well water - eliminate
health threat
Powell (1991)
Respondents subjective
rating of ground water
condition (unsafe,
somewhat safe, safe, or
very safe)
Very Safe - "I fee!
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."
Sun (1990)
Subjective perceptions
measured
Protect so below EPA
health advisory levels for
pesticides and fertilizers
Shultz (1989)
Not specified objectively
or subjectively
Reduce potential of
contamination (increment
not specified)
Edwards (1988)
Subjective perceptions
measured
Future contamination -in
5, 10, 20, or 40 years
-0%, 25%, 50%, 75% or
100% probability of
contamination
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36
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. Caudili (1992) and Shultz (1989) did not establish either an
objective or subjective reference conditions for their valuation exercises.
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
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37
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 Maani, 1992; and Lichtenstein, et al., 1978).6 The Powell study
meets this hurdle head on, but also raises questions. For instance, how can value
estimates, based on subjective perceptions, be linked to actual changes in ground water
conditions? These are fundamental issues in 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 drinking 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
6 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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38
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 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 in
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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39
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.
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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40
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.
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 in 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.
J
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41
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 omitted?
Were benefits of reducing health risks underestimated?
These issues may not be relevant for the RIA, but the available documentation does not
allow us to answer these questions.
Draft RIA for Final Rulemaking 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 in 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
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42
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 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 derive 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 in 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 is potential double counting with the use
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43
value measures. Precisely, is there double counting with the averted-cost and hedonic-
price measures of benefits? Since an integrative 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:
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 water?
Does the lack of a conceptual framework for integrating the various
benefits estimates lead to double counting of some benefit components?
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
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44
considering potential benefits of the action. Given the applications, we ask whether
important benefit categories were omitted in both RIAs and whether values may have
been underestimated for benefit categories 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 categories, 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
intergenerational 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
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45
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
l
technology or data. More research is needed to develop data bases and models to assess
the effects of ground water policies on biophysical changes in 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 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
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46
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 contained in 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.
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47
Name of Proposed action?
What is the current ground water condition?
Contaminated >
Uncontaminated >
What are the
Contaminant
contaminants?
Geographic
Concentration Extent
What are the
Contaminant
potential contaminants?
Geographic
Concentration Extent
Unknown
What is the proposed action?
Protection >
Remediation --->
What are the proposed
policies or rules
What are the proposed
policies or rules?
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48
What are the sources of contamination?
Known
List of sources:
Source Contaminant
Unknown
What would the ground water condition be over the study time frame without any
action (reference condition)?
Quantity Quality
Year 1
Year 2
Year 3
Etc.
What would the ground water condition be over the study period with action
(subsequent condition)?
Quantity Quality
Yearl
Year 2
Year 3
Etc.
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49
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 in 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 uncontaminated. 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
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52
quality is threatened by contaminated ground water. The extent and timing of the
potential contamination is unknown.
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 involved? Are the magnitudes of contamination
comparable? Were the valuation studies conducted adequately, e.g., are estimates biased
or have large variances?
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" in 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
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53
Table 7a. Available Data for Valuing Changes in Ground Water Services - 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
Estimaie(s)
Valuation
Method
Quality Changes
Increment
Evaluated
30 ppb
Reduction
No effect
No effect
No effect
Value
Estimate(s)
None
Available
Valuation
Method
N/A
"Quality 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 hypothetical
example we assume value data are not available to assign initial values to the reduction
in quality.8
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 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
8 A number of Meta analyses of environmental values are being developed. These
studies could, if developed for ground water valuation (Boyle et a]., 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 a]., 1988).
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54
(Table 7b). 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 for value
estimates indicates the values 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 function of ground water
discharge to surface water. We omit this step here for expositional convenience.
The final step is to identify services that will not be monetized and the reasons for
these decisions (Table 8). We assume there are no effects that are not monetorized in
this simplistic example. We do assume there is a 50% chance of the 30 ppb
contamination actually occurring. The expected change can be monetorized in some
instances using appropriate measures of economic value under uncertainty (e.g., option
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
Mel hod
Contingent
valuation or
averted cost
Value
Estimates
7
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55
Table 8. Other Valuation Considerations for Changes in Ground Water Services - Stock Function
Services
Drinking Water
Crop Irrigation
Livestock Watering
Food Product
Processing
Nonmonetorized Effects
(Reason Why)
None
None
None
None
Treatment of
Uncertainly
50% chance of
contamination
Sensitivity Analyses
Geographical extent
of contamination
price described previously). 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
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56
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 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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