EPA-600/4-76-045
September 1976
Environmental Monitoring Series
MONITORING GROUNDWATER QUALITY
ECONOMIC FRAMEWORK AND PRINCIPLES
I
55
.W.
Environmental Monitoring and Support Laboratory
Office of Research and Development
U.S. Environmental Protection Agency
Las Vegas, Nevada 89114
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RESEARCH REPORTING SERIES
Research reports of the Office of Research and Development, U.S. Environmental
Protection Agency, have been grouped into five series. These five broad
categories were established to facilitate further development and application of
environmental technology. Elimination of traditional grouping was consciously
planned to foster technology transfer and a maximum interface in related fields.
The five series are:
1. Environmental Health Effects Research
2. Environmental Protection Technology
3. Ecological Research
4. Environmental Monitoring
5. Socioeconomic Environmental Studies
This report has been assigned to the ENVIRONMENTAL MONITORING series.
This series describes research conducted to develop new or improved methods
and instrumentation for the identification and quantification of environmental
pollutants at the lowest conceivably significant concentrations. It also includes
studies to determine the ambient concentrations of pollutants in the environment
and/or the variance of pollutants as a function of time or meteorological factors.
This document is available to the public through the National Technical Informa-
tion Service. Springfield. Virginia 22161.
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EPA-600/4-76-045
September 1976
MONITORING GROUNDWATER QUALITY:
ECONOMIC FRAMEWORK AND PRINCIPLES
by
Robert L. Crouch
Ross D. Eckert
Donald D. Rugg
General Electric Company—TEMPO
Center for Advanced Studies
Santa Barbara, California 93101
July 1976
Contract No. 68-01-0759
Project Officer
George B. Morgan
Monitoring Systems Research and Development Division
Environmental Monitoring and Support Laboratory
Las Vegas, Nevada 89114
U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF RESEARCH AND DEVELOPMENT
ENVIRONMENTAL MONITORING AND SUPPORT LABORATORY
LAS VEGAS, NEVADA 89114
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This report has been reviewed by the Environmental Monitoring and Support Lab-
oratory—Las Vegas, U.S. Environmental Protection Agency, and approved for publi-
cation. Approval does not signify that the contents necessarily reflect the views and
policies of the U;S. Environmental Protection Agency, nor does mention of trade
names or commercial products constitute endorsement or recommendation for use.
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TABLE OF CONTENTS
Page
LI STOP ILLUSTRATIONS v
ACKNOWLEDGMENTS v?
SECTION I - INTRODUCTION 1
Why Groundwater May Become Excessively Polluted 1
Preventing Excessive Pollution of Groundwater 4
Groundwater Management Objectives 4
SECTION II - INSTITUTIONAL AND LEGAL BACKGROUND 7
The Legal Situation 7
PL 92-500 (Federal Water Pollution Control Act) and
PL 93-523 (Safe Drinking Water Act) 10
EPA's Evolving Water Quality Strategy 11
SECTION III - HYDROGEOLOGIC CASE STUDY AND ECONOMIC
PRINCIPLES 13
Hydrogeologic Example 13
Economic Principles 18
SECTION IV - MONITORING AND GROUNDWATER QUALITY
STANDARDS 30
Definitions of Information and Compliance Monitoring 30
Information Monitoring 31
Compliance Monitoring 34
The Pragmatic Alternative—Second-Best Solutions 61
SECTION V -WASTE RELOCATION RIGHTS: AN ALTERNATIVE
SYSTEM OF GROUNDWATER MONITORING AND
POLLUTION CONTROL 66
Administrative versus Nonadministrative Pollution
Monitoring and Control 66
Waste Relocation Rights 69
Court Enforcement and Strict Liability 71
The Zero Waste Relocation "Right" 73
(continued)
in
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CONTENTS (continued)
Page
Setting the Initial Waste Levels 74
Exchanging Waste Relocation Rights 75
Restructuring Waste Relocation Rights 76
Sales of Land with Waste Relocation Rights 78
Waste Relocation Rights and Nonlandowners 81
An Appraisal of Some Potential Problems 82
Situations Inappropriate for Waste Relocation Rights 91
Conclusions 93
REFERENCES 94
APPENDIX 97
IV
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LIST OF ILLUSTRATIONS
Figure No. Page
1 Geography of case study. 14
2 Hydrogeology of case study: elevation. 15
3 Hydrogeology of case study: plan. 17
4 Alternative steady-state time profiles of chloride concentration. 18
5 Farmer's total damages function. 21
6 Farmer's marginal damages function. 21
7 Oil company's total benefits function. 22
8 Oil company's marginal benefits function. 23
9 The efficient solution. 24
10 First limiting case. 28
11 Second limiting case. 29
12 The probability of detection function. 38
13 The gain from a standards violation. 39
14 Detection and the size of the violation. 39
15 The probability of detection and the severity of the violation. 41
16 The marginal cost of compliance monitoring. 42
17 The expected fine and the seventy of the violation. 45
18 The expected fine and expenditure on compliance monitoring. 47
19 The expected cost and the severity of the violation. 47
20 The optimum violation. 49
21 The preference function. 49
22 The revised optimum violation. 50
23 The benefits from violation reduction. 52
24 Diminishing returns to violation reduction. 52
25 Compliance monitoring and the total social loss avoided. 53
26 The total benefits from compliance monitoring. 55
27 The marginal benefits from compliance monitoring. 55
28 The optimal probability of detection. 56
29 Second-best alternatives. 61
30 Land parcel diagram, chloride pollution example. 76
31 Seawater intrusion example. 92
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ACKNOWLEDGMENTS
Dr. Richard M. Tinlin, Dr. Lome G. Everett, and the late Dr. Stephen
Enke of General Electric —TEMPO were responsible for management and
technical guidance of the project under which this report was prepared.
The following officials were responsible for administration and techni-
cal guidance of the project for the U. S. Environmental Protection Agency:
Office of Research and Development (Program Area Management)
Mr. Albert C. Trakowski, Jr.
Mr. John D. Koutsandreas
Environmental Monitoring and Support Laboratory Las Vegas
(Program Element Direction)
Mr. George B. Morgan
Mr. Edward A. Schuck
Mr. Leslie G. McMillion
Mr. Donald B. Gilmore
The following personnel of the U. S. Environmental Protection Agency
are to be thanked for their review and constructive criticism of this report:
Mr. George A. Garland, Deputy Director, Systems Management Division,
Office of Solid Waste Management Programs, Mr. H. R. Reinhardt of the
Office of Technical Analysis, and Dr. Richard Schaefer, Office of Air,
Land, and Water Use, Washington, D. C.
VI
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SECTION I
INTRODUCTION
This report presents an analytical framework for evaluating the eco-
nomic issues raised by monitoring in support of the development and en-
forcement of groundwater quality standards. The discussion that follows
incorporates certain legal and institutional aspects of various monitoring
philosophies and methodologies with economic principles and issues.
This analytical framework is presented in terms of case studies and theo-
retical situations, some aspects of which may appear to be in conflict with
the mandates of the Federal Water Pollution Control Act, as amended by
Public Law 92-500, and the Safe Drinking Water Act, Public Law 93-523.
Accordingly, it is to be understood that the concepts, as presented in this
discussion, do not necessarily reflect U.S. Environmental Protection
Agency policy, although the document has been reviewed by the EPA and
approved for publication.
Section II is a brief description of the existing institutional and legal
structure; Section III presents a hydrogeological case study and develops
the analytical framework in which the economic issues raised by ground-
water monitoring will be discussed; Section IV is an economic analysis
of the principles governing groundwater monitoring in support of (1) de-
veloping groundwater quality standards, and (2) enforcing compliance
with those standards; Section V examines an alternative legal and insti-
tutional structure designed to ensure that an optimum use of the waste-
assimilative capacity of the Nation's groundwater is achieved.
WHY GROUNDWATER MAY BECOME
EXCESSIVELY POLLUTED
If (1) all markets were competitive, (2) market transactors had full
information, (3) resource-owners put the resources they own to their
highest valued use, and (4) enforceable property rights existed in all re-
sources, then society's economic resources would be efficiently allocated.
"Efficiently allocated" is used to mean that no other allocation would be
possible which would make one transactor better off without making at
least one other transactor worse off. Such an allocation is also described
as pareto-optimal (Arrow 1951 and 1962, Arrow and Debreu 1954, Quirk
and Saposnik 1968).
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Under such an allocation of society's resources, groundwater re-
sources would be used in .optimal amounts for irrigation, cooling, drink-
ing, etc. , as well as for the disposal of wastes. Although the optimal
portion of groundwater resources used for waste disposal under such an
efficient allocation of resources may be small, it cannot be stressed too
strongly that an abiding concern for the environment will not change the
fact that wastes are an unavoidable byproduct of all man's activities.
Recognizing that these wastes must be disposed of somewhere, the sub-
stantive questions of the optimum production of wastes and their optimum
disposal must be addressed. Clearly, the Nation's aquifers, like every
other sector of the environment, are a candidate repository for the dis-
posal of some of society's wastes. The question, then, is not "whether"
but "where" and "how much. "
The evidence indicates that some of the Nation's groundwater (like our
other environmental resources such as the air and surface waters) has
become, or is becoming, excessively polluted. This means that ground-
water is not being efficiently allocated among its alternative uses. On
the contrary, its potential for irrigation, drinking, cooling, etc. , is being
abused by the overutilization of groundwater resources as a repository for
society's wastes.
The reason that groundwater becomes excessively polluted is that the
fourth condition necessary for the efficient allocation of resources, en-
forceable property rights, is not met with respect to groundwater. In
general, property rights in groundwater are poorly specified.
If the property right in a resource is well specified, the owner has
the maximum incentive to invest in the optimal amount of information on
the alternative uses for his resource because he can appropriate to him-
self most of the rewards from his investment in acquiring that informa-
tion. Indeed, the greater the appropriability of the benefits that can be
derived from a resource, the greater the cost to an owner of no_t_allocat-
ing that resource to its highest valued use and, therefore, the greater
the incentive for economic efficiency. Hence, a better specification of
property rights in resources leads to the appropriation of greater bene-
fits from those resources by owners and this in turn leads to more effi-
cient conservation of society's resources.
A burgeoning literature under the general rubric of "property rights"
shows that different configurations of legal rights and duties impact on
the resource owner's cost-reward calculus and generate different re-
source allocations. See, for example, Alchian (1961), Alchian and Kes-
sel (1962), Coase (I960), Demsetz (1966 and 1967), De Vany et al. (1969),
and Furubotn and Pejovich (1972).
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The property rights to a resource are well specified when (1) the re-
source can be defined unambiguously (or, as in the case of land, where
there are well-defined procedures for delimiting its boundaries), (2) the
owner can capture all the benefits from the use of the resource to the ex-
clusion of all other persons, (3) it can be protected at low cost against
unauthorized use, and (4) title to the resource can be preserved and trans-
ferred among owners (a tract index, for example, in the case of land).
The importance of specifications can be appreciated best when there
are no specifications. An ambiguous description of the resource raises
negotiation or litigation costs and will, therefore, restrict exchanges;
nonexclusivity in the appropriability of the benefits from the resource
and high enforcement costs to prevent unauthorized use both attenuate
the incentive to husband the resource, while imperfect titles and high ex-
change costs diminish the incentive to transfer the resource to higher
valued uses.
The property rights in the Nation's groundwater are poorly specified
on all four counts given above. Aquifers are poorly defined "common
pools" with titles to their use and abuse not effectively preserved or trans-
ferred. In particular, lack of exclusivity in the appropriability of the
benefits from aquifers and the high enforcement costs to prevent unauth-
orized use have given rise to two classic problems in the economics of
hydrogeology. The first (associated with the lack of exclusivity in the
appropriability of the benefits) is the problem of overuse or too rapid
depletion of aquifers. (For an authoritative discussion of the problem
see the appendix by Brown in Corker (1971).) The second (associated
with the high enforcement costs to prevent unauthorized use) is the prob-
lem of excessive pollution of aquifers. When one party uses another
party's resource without authorization, he thereby imposes uncompen-
sated damages on the resource owner. An external cost is said to have
been generated. (For the modern view of the connection between property
right specifications and the existence of externalities see Buchanan and
Stubblebine (1962), Cheung (1969), Coase (I960), Demsetz (1964 and 1969),
Mishan (1971), and Stigler (1961). In general, externalities arise when
problems exist with respect to the definition, exchange, policing, and en-
forcement of property rights.)
In the absence of any obligation to compensate those whose aquifer he
is using as a waste disposal site, such waste disposal services appear free
to the polluter. Polluters will, therefore, utilize such a service until
the marginal private benefit obtained by them from using that service is
driven down to zero —even though the marginal social cost may be positive
and large. Consequently, the aquifer's waste receptor capabilities are
abused and it becomes excessively polluted.
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PREVENTING EXCESSIVE POLLUTION
OF GROUNDWATER
In principle, there are two ways to prevent excessive pollution of
groundwater. First, by government intervention in the effluent discharge
process. Under this regime the government may either set, and enforce,
groundwater quality standards by some form of direct regulations involv-
ing discharge licenses, or induce conformity to the standards by levying
a tax on effluents or paying a subsidy for effluent reduction. (The moni-
toring implications of direct government intervention in the effluent dis-
charge process are discussed in Section IV. ) Second, the property rights
to groundwater can be respecified so that they approach more closely the
four requirements of a well-specified property right. (This possibility
and the monitoring that would be implied are discussed in Section V. )
Under this response to the problem of excessive groundwater pollution,
the government's direct intervention is kept to a minimum. It merely
performs its function of assigner of property rights through legislation
and arbitration of disputes 'concerning property rights through its judicial
media.
GROUNDWATER MANAGEMENT OBJECTIVES
Views similar to those outlined under this subheading have been ex-
pressed by the U. S. Council on Environmental Quality (1973). Efficient
environmental decision-making requires that consideration be given to
four categories of costs. First there are damage costs. These are
costs which are generated directly by a polluting activity. With respect
to groundwater resources, one example would be increased physiological
damage caused by pollution of drinking water. Another example would
be crop losses resulting from pollution of an irrigation well. Second,
there are avoidance costs. These are costs which are incurred by soci-
ety in order to avoid, or reduce, damage costs. With respect to ground-
water resources, one example would be the importation of unpolluted
water to replace that previously obtained from a well that has become
polluted. Third, there are abatement costs. These are costs associated
with the reduction of pollution. Such reduction of pollution can be achieved
either by controlling the source or by treating the polluted water. With
respect to groundwater resources, one example would be the deep injec-
tion into a safe geologic zone of noxious effluents previously disposed of
in an aquifer. Fourth, there are transactions costs. Transactions costs
include the cost of all those resources allocated to the establishment, and
enforcement, of environment-preserving policies and regulations. With
respect to groundwater resources, the most important example of a trans-
action cost, and of special relevance to this study, would be the cost of
monitoring groundwater pollution either to generate information on quality
and quantity or to detect violations of, and ensure compliance with, ground-
water quality standards.
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The essential principle to note is that these four cost categories are,
in general, interdependent. Thus, any new groundwater quality policy
will probably affect all four categories. For example, if a policy is in-
troduced" which is designed to reduce groundwater pollution, it will cer-
tainly reduce damage costs but may very well increase abatement, avoid-
ance, and monitoring costs. Usually, each feasible groundwater quality
policy will affect these four categories of cost differently. Obviously the
only groundwater quality policy alternative that should be seriously con-
sidered for implementation is that set of policies for which the reduction
in damage costs exceeds the net increase, if any, in avoidance, abatement,
and monitoring costs. To go even further than this, the most efficient, or
optimal, groundwater quality policy among the feasible set of alternatives
is that policy which minimizes the sum of the damage costs, avoidance
costs, abatement costs, and monitoring costs for a given groundwater
pollution situation. Implicitly, the minimization of these costs is equiva-
lent to the maximization of society's income or gross national product
(GNP). Therefore, for this analysis the maximization of GNP has been
adopted as the environmental management objective. *
r*
To illustrate by example, sewer leakage is known to pollute ground-
water and may, therefore, impose certain damage costs and avoidance
costs. However, with present technology there is no way of controlling
this source of pollution that does not impose abatement costs that are far
in excess of the reduction in damage and avoidance costs which would be
achieved. It follows that the efficient policy is not to monitor and abate
this pollution source, but simply to accept the existing level of damage
and avoidance costs.
Of course, in many other groundwater pollution situations the reduc-
tion in damage costs will exceed the increase in avoidance, abatement,
and monitoring costs that bring those reductions about. The objective
then becomes that of selecting the avoidance, abatement, and monitoring
strategy which generates, at the margin, decreases in damage costs just
equal to the increases in the avoidance, abatement, and monitoring costs
required by the strategy.
The attainment of this objective will not simply involve the minimiza-
tion of monitoring costs by the responsible government agency. For
example, in any given groundwater pollution situation there may well be
several different abatement strategies, each with an associated monitor-
ing requirement, that would achieve the desired level of groundwater
*For a comprehensive discussion of other possible objectives, see Dorf-
man and Dorfman (1972), Chapter 1. They observe, however, that "The
GNP criterion is the most practicable one of all, in fact the only one
that can be applied with much assurance. " (p xxvii).
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quality. If the public agency responsible for selecting among the abate-
ment and monitoring strategies simply chooses that alternative which
minimizes its own monitoring costs, this could imply higher private
abatement costs with the result that the combined monitoring and abate-
ment costs of that policy would be greater than the combined monitoring
and abatement costs of some other strategy. Clearly, this would not be
efficient from society's point of view.
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SECTION II
INSTITUTIONAL AND LEGAL BACKGROUND
t
Section I points out that the major reason why the Nation's ground-water
may become excessively polluted is that property rights in groundwater
are poorly specified and so do not effectively protect aquifers against un-
authorized use. Consequently, the capacity of aquifers to assimilate
waste is being abused and uncompensated damages, or external costs,
are being imposed on the owners of the resource. This section focuses
first on the issue of unauthorized use by polluters, then on corrective
efforts to date.
THE LEGAL SITUATION
Views expressed under this subheading rely heavily on Corker's au-
thoritative discussion of groundwater law (Corker 1971, Chapter III). It
may be stated as a general proposition that the law does grant a land-
owner a property right in the groundwater underlying his land. This
title is granted under the doctrines of "absolute ownership, " "reasonable
use, " "correlative rights, " or "appropriative rights, " depending on the
State in which the landowner resides. In addition, a landowner whose
groundwater is polluted by some other party may seek redress through
the courts. Such redress may be sought under the traditional four con-
cepts of negligence, nuisance, trespass, and, less frequently, strict
liability. Of these legal remedies, resort is had most often to the law
of nuisance. Thus, theoretically, the law stands behind a landowner who
wishes to protect his groundwater against unauthorized pollution. The
problem is that, in practice, the actual application of the law of nuisance
is fraught with uncertainty. Corker states:
Nuisance is an amorphous term which describes the sub-
stantial interference with the use of property for which a
court will grant relief. To recover on a theory of nuisance,
when pollution is intentional, as is often "legally" the case*
one must in addition to proving the existence of a nuisance
also prove that the activity is "unreasonable. " What is
^Corker's footnote states, "One is said to intend the results of his con-
duct if he continues to engage in an activity after recognition of its side
effects. "
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"unreasonable" depends upon a judicial weighing of an
open ended list of factors, including the extent and charac-
ter of the harm involved, the social value which the law
attaches to the respective parties' activities, the suitabil-
ity of each party's conduct to the locality, and the burden
that would be imposed by compelling an interfering party
to cease carrying on his activities. Because a particular
activity will be characterized as a nuisance in one situa-
tion, but not in another, a user of land cannot always pre-
dict, in advance of a court room battle, whether he will
be held liable for the pollution caused by his activities.
Yet, despite difficulties with the concept of nuisance in
the pollution field and elsewhere, legal critics have not
found an acceptable substitute. (Corker, 1971).
The only legitimate inference that a landowner could make from this
authoritative interpretation of the law of nuisance as applied to ground-
water pollution is that his property right in underlying groundwater is
decidedly shaky when it comes to its protection against unauthorized use
by polluters. Given the uncertainty of retribution in the courts under the
law of nuisance, it should not be found surprising that polluters have
abused their neighbor's groundwater.
When not dealt with under the legal rubric of nuisance (and in the ab-
sence of negligence, trespass, or abnormally dangerous conduct), lia-
bility for pollution of groundwater has, instead, been dealt with under
the doctrines of absolute ownership, reasonable use, correlative rights,
or appropriative rights.
Depending on the jurisdiction, the doctrines of absolute
ownership, reasonable use, and occasionally the doctrines
of correlative rights or prior appropriation have tended to
be mechanically applied .... [Application of] the doc-
trines of absolute ownership, correlative rights, and prior
appropriation to disputes among competing water and land
users can produce surprising and undesirable results.
Under the literal doctrine of absolute ownership, a water
user will not be able to recover for injury to his water
supply, even when the land user can foresee and avoid such
damage. Under the doctrine of correlative rights a third
party may be required to pay damages, even though injury
is unforeseeable and his activity was a natural and legiti-
mate use of his land. Under a strict reading of prior
appropriation, a mining or land development corporation
can be enjoined from use of land, even when the proposed
operations will drain but one shallow neighboring well.
8
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The reasonable use doctrine in a third party setting is also
unsatisfactory, although use of this doctrine has produced
fewer disquieting results in the past. Courts have utilized
this doctrine to prevent recovery of damages when injury
was unforeseeable, a result consistent with tort doctrines
of nuisance, and strict liability. This distinction between
percolating water and subsurface streams was developed
and has been utilized to prevent imposition of liability for
unexpected results. It is uncertain, however, whether
under a reasonable use theory, damages can be recovered
because injury to "percolating" groundwater was a fore-
seen, but unavoidable, consequence of land use and the
land operation was pursued in the face of this knowledge.
If in determining whether a land use is "reasonable" the
extent of damage to the aquifer and other surrounding
circumstances are overlooked, the result will at times
be clearly wrong. If, however, in the determination of
whether a use is reasonable the gravity of the harm done
to the water user is weighed against the utility of the land
use, the result will be the same as under nuisance theory
. . . (Corker, 1971; emphasis added).
It is clear that the attempted resolution of disputes over the liability for
groundwater pollution in water doctrinal terms is as unsatisfactory as
resolutions sought through the law of nuisance. Resource owners will
not feel secure in their property and protected against unauthorized users
when the law produces "surprising and undesirable results. "
Two cases quoted in the American Law Reports, Annotated, Second
Series (38ALR 2d), "Liability for Pollution of Substream Waters, " illus-
trate by particular examples the uncertainty and arbitrariness which sur-
round liability for groundwater pollution:
Where a company drilling for and producing oil brought
salt water to the surface . . . the fact that the company
connected a pipeline conveying its salt water with a line
of the sewer system of a city and the city permitted the salt
water to flow into a canal, from where it seeped into the
source of the water supply of the plaintiff, thereby damaging
it, did not excuse the company from the liability for damages
for allowing the salt water to leave its premises. Berry v.
Shell Petroleum Co. (1934) 140 Kan 04, 33 P2d 953, reh den
141 Kan 6, 40 P2d 359.
Q REGION III LIBRARY
y E:r/rnoN-is:iTAL PROTECTION AGENC?
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In this case it would seem reasonable to have held the city guilty and the
oil company innocent. But such was not the verdict. Conversely, consider:
Phoenix v. Graham (1953) 349 111 App 326, 110 NE2d 669,
in which the plaintiffs sought recovery for contamination of
their water well by salt water from the pits into which the
water was diverted upon separation from the oil. The court,
reversing a judgment for the plaintiffs, . . . pointed out that
the cases in other jurisdictions are practically uniform that
the operator is not liable to his lessor for salt-water damage
unless it was caused by negligence in the operations.
In this case, it might seem reasonable to hold the oil company liable for
its nuisance. However, such was not to be the appeal court's verdict.
As might be expected, it does seem easier to obtain redress in the courts
if negligence on the part of the polluter can be shown. However, this is
little comfort to an owner of groundwater because, in practice, negligence
is often not present even though pollution of his property occurs.
Even from this brief analysis of the application of the law of nuisance
and various water doctrines to the problem of liability for groundwater
pollution, it is apparent that aquifer owners are not secure in the protec-
tion of their property against unauthorized users. Consequently, it should
be no surprise that such unauthorized use occurs and that the Nation's
groundwater is threatened with excessive pollution. It is against this
background of legal uncertainty that Corker felt compelled to recommend
statutory, and publicly administered, water quality controls which would
require permits for the execution of activities which are potentially harm-
ful to the Nation's groundwater (Corker, 1971).
PL 92-500 (FEDERAL WATER POLLUTION CONTROL ACT) AND
PL 93-523 (SAFE DRINKING WATER ACT)
Statutory, publicly administered, and permit-oriented legislation di-
rected towards the protection of the Nation's water supplies in general,
including its groundwater supplies, was enacted by Congress in October
1972 over the President's veto in the form of the Federal Water Pollution
Control Act, PL, 92-500. Analogous legislation designed to protect the
Nation's drinking water supplies became law in December 1974 in the
form of the Safe Drinking Water Act, PL, 93-523.
PL 92-500's objective "is to restore and maintain the chemical, physi-
cal, and biological integrity of the Nation's waters" (Section 101(a)). In
pursuit of these objectives, "The [EPA] Administrator shall establish
10
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national programs for the prevention, reduction, and elimination of pol-
lution and as part of such programs shall . . . establish, equip, and
maintain a water quality surveillance system for the purpose of monitor-
ing the quality of ... groundwaters" (Section 104(a) (5)). Similarly,
PL 93-523 obliges the EPA Administrator to ". . . establish recom-
mended maximum contaminant levels for each contaminant which . . .
may have any adverse effect on the health of persons (Section 1412 (b)
(1) (B)). Before the Administrator may approve a State's regulatory
program, he must be assured that the State's program includes "inspec-
tion, monitoring, recordkeeping, and reporting requirements" (Section
1421(b) (1) (C)).
In the larger sense, this report explores the issues involved in estab-
lishing, equipping, and maintaining alternative water quality surveillance
systems in order to reveal the principles on which the selection of a pre-
ferred surveillance, or monitoring, strategy should be based.
EPA's EVOLVING WATER QUALITY STRATEGY
The obligation to implement PL 92-500 and PL 93-523 falls on the
EPA. In execution of that responsibility, the EPA issued the second edi-
tion of its Water Quality Strategy Paper in March 1974 (USEPA, 1974).
The EPA's strategy is not cast in concrete and a conscious effort has
been made to ensure that "there is flexibility to adjust to ... circum-
stances through periodic revisions" (USEPA, 1974). However, certain
policies appear to be well-enough established to rely on them as guide-
posts to direct this inquiry. The most important of these is the policy
to control pollution by a groundwater quality standards mechanism im-
plemented through a permitting scheme. Consequently, this analysis is
limited to monitoring in the context of such a permitting scheme and
does not pursue the issues involved in monitoring if groundwater quality
standards were to be achieved through an effluent charges scheme, a
pollution reduction subsidy scheme, etc.* The only exception to this
limitation occurs in Section V, which explores an alternative legal and
institutional structure designed to ensure an optimum use of the waste-
assimilative capacity of the Nation's aquifers.
*It cannot be stressed too strongly that this restriction does NOT imply
an opinion that direct regulation by a permit scheme is the most effi-
cient form of groundwater pollution control. An elementary discussion
of the pros and cons of different pollution control schemes is contained
in the Fourth Annual Report of the U.S. Council on Environmental Qual-
ity (USCEQ, 1973); a more sophisticated treatment is contained in Maler
(1974).
11
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In March 1974 the EPA concluded that its "review of FY 1974 monitor-
ing activities indicates that . . . there is still a need to establish a basic
national direction of effort" (USEPA, 1974). The remaining sections in
this report are intended to help direct the Nation's groundwater monitor-
ing effort along fruitful paths.
12
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SECTION III
HYDROGEOLOGIC CASE STUDY
AND ECONOMIC PRINCIPLES
This section and Section IV examine the monitoring implications of a
government permitting scheme to prevent excessive groundwater pollu-
tion from effluent discharge.
Since groundwater is a relatively unfamiliar resource, a hypothetical
case study is used to convey the minimum essential hydrogeologic infor-
mation that is required to obtain an appreciation of the complications in-
volved in monitoring. This hydrogeologic example is then used to illus-
trate the economic issues involved in groundwater quality control and its
monitoring.
HYDROGEOLOGIC EXAMPLE
The hydrogeologic example involves a wide variety of factors which
include the basic situation (parties involved, land use, etc. ), geography,
hydrogeology, existing groundwater pollution information, and the con-
figuration of the pollution plume.
Pollution Situation*
The illustrative example is a simple one involving an oil company
(Party A) and a farmer (Party ]3). Party 13, the pollutee, uses a 100-
gallon per minute (gpm) well located on his property for supplemental
irrigation of 1000 acres of level land. ^ Although Party B_ is not aware
of it, his well is becoming polluted by an unlined oil-field brine disposal
pit operated by Party A. The farmer uses his land to grow rice —a crop
for which irrigation is~mandatory, given the average local rainfall of
48 inches per year. Since the rain is fairly evenly distributed through-
out the year, the well is used for irrigation only during the months of
August and September. The farmland is easily converted to produce
cotton, soy beans, and Bermuda grass —lower valued crops which are
less sensitive to salt pollution and do not require irrigation, although
irrigation greatly increases yields.
*For an actual case study see USEPA (1972).
An English-to-metric unit conversion table is appended to this report.
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Geography
The geographic relationship between the disposal pit and the irrigation
well is presented in Figure 1. The farmer's well is located 750 feet from
the unlined disposal pit, and 250 feet from the property line. The eastern
border of the farmer's land is an ocean coastline into which the ground-
water ultimately flows and from which seawater may conceivably intrude.
A 500-milligram per liter (mg/1) isopollution contour is shown at time
to when pollution is detected at B_'s well. (An isopollution contour is de-
fined by the locus of all points of equal pollution intensity. ) This concen-
tration level is of critical importance since rice is assumed to be insen-
sitive to lower chloride concentration levels. The dimensions of the
plume are not known to either party at this time; all that is known by B is
that his well is polluted.
Hydrogeology
An unsealed elevation of the hydrogeological situation at time (t(j) is
shown in Figure 2. The geology of the strata underlying the subject area
is assumed to be known to the polluting oil company from its drilling
A's PIT
PROPERTY
BOUNDARY
COASTLINE
500 mg/l
ISOPOLLUTION CONTOUR
B's WELL
GROUNDWATER
GRADIENT
OCEAN
Figure 1. Geography of case study.
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INDIRECTION OF FLOw||
NOTE: NOT TO SCALE =
Figure 2. Hydrogeology of case study: elevation.
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activities but not to the farmer. The farmer's well draws from an un-
confined alluvial aquifer near the surface. This aquifer is separated
from a deeper unpolluted sand aquifer by a layer of confining clay. Thus,
in principle, the farmer can avoid the damage he is sustaining by deep-
ening his well into the unpolluted sand aquifer.
The alluvial aquifer is about 40 feet thick and the water table is about
10 feet below the surface of the ground. The polluted aquifer has a per-
meability of 1500 gallons per day per foot (gpd/ft) and a groundwater
gradient of 1.4 feet per mile in an easterly direction (i. e. , directly from
the brine disposal pit and past the water well to the ocean). With this
permeability and gradient the natural rate of groundwater flow is about
20 feet per year. It therefore takes about 38 years for the pollutants to
travel from the brine pit to the irrigation well. Since groundwater gener-
ally has an extremely slow rate of movement the rate hypothesized here
is not at all unusual. These slow rates of groundwater movement and
pollutant transport complicate analysis of pollution problems.
Note that seawater intrusion represents a second possible pollution
source and that the groundwater polluted by the disposal pit eventually
flows into the sea, which is assumed to be a zero cost dump for the
contaminated water.
Existing Pollution Information
The types of information required in an analysis of groundwater pollu-
tion situations include the type, source, distribution, concentration, and
movement of pollutants. It is assumed, as indicated above, that the
farmer has recently identified the type of pollutant by appropriate chem-
ical testing, but that he is entirely ignorant of all the other information
and hence not able to predict probable future damages to his crop. It
is further assumed that the oil company is completely unaware of the
problem.
Pollution Plume
The three-dimensional pollution plume changes shape over time due
to the normal diffusion process occurring within the aquifer. For pur-
poses of case specification the chloride concentration level at the farm-
er's well is of particular interest between the time when the pollution is
first discovered by the farmer (IQ) and the time at which the plume con-
figuration reaches a steady-state configuration (t«). The steady-state,
or long-run equilibrium, position in the absence of any abatement activ-
ities, is shown in Figure 3. By time tg all of B_'s groundwater would be
tainted by chlorides in excess of 500 mg/1 and the chloride concentration
at his well would be 5000 mg/1. Such levels of pollution are assumed to
16
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GROUNDWATER
GRADIENT
COASTLINE
OCEAN
Figure 3. Hydrogeology of case study: plan.
he lethal to all feasible crops. The time-profile without abatement of the
chloride concentration at B's well between t0 and tg is shown by the solid
curve labeled Clj in Figure 4. If the polluting activity is abated com-
pletely at to by some pollution control device such as pit-lining and rely-
ing on evaporation to dispose of the water, the time-profile of chloride
concentration at B's well would be as shown by the dashed curve labeled
Cl£. When effective abatement is undertaken the chloride concentration
gradually decays back to the ambient level as a result of dilution and flush-
ing processes. Because of the slow rate of pollutant transport by ground-
water, the time taken for the maximum chloride concentration to occur
at the farmer's well if no corrective action is undertaken, or the time
taken for the chloride concentration to return to the ambient level if effec-
tive abatement is undertaken, can both be considerable—easily 30 to 100
years. Because of these sizable time lags in the movement of polluted
groundwater, one strong inference may be drawn immediately. If it pays
at all, it will probably only pay to treat existing polluted groundwater at
the point of use because abatement at the point of source may take decades,
or even centuries, to have any impact. Consequently, with any reasonable
discount factor, the present discounted value of the net benefits derived
from source abatement will almost certainly be zero or negative.
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CHLORIDE AT
FARMER'S WELL, mg/l
Cl, , STEADY-STATE
CL, CORRECTIVE ACTION
TAKEN AT tQ
CI0, AMBIENT LEVEL
TIME, YEARS
Figure 4. Alternative steady-state time profiles of chloride concentration.
ECONOMIC PRINCIPLES
Since the optimal allocation of resources to groundwater quality moni-
toring depends on the optimal level of aquifer quality and especially on the
costs and benefits to society of deviations from that optimum level of
aquifer quality, it is necessary to discuss how the optimal level of aquifer
quality is, itself, determined.
The Damages (Cost) Functions
In the illustrative case the costs of pollution are incurred by the farmer
in the form of crop damage; increases in brine pollution will first reduce
rice crop yields and eventually force the farmer to employ his land in the
production of irrigated crops with a lower net value. Ultimately, the
brine pollution will force the farmer to cease irrigation from his well
entirely and rely on natural precipitation, drill a new well, import water,
etc. The total damage (D^) to the farmer (B) attributable to the oil com-
pany (A) pollution of his well can be represented as follows:
t=<»
= N 1 JH - K[Cl(t)]j
t=0
dt
(1)
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where
N is the number of acres under cultivation
t is the time period (years)
H is the net annual dollar return from an acre when
employed in its highest valued use and the farmer's
well is not polluted*
K[C!(t)] is the net annual dollar return to an acre of land
when employed in its highest valued use, given that
Cl(t) is the average chloride concentration at the
farmer's well during time t
r is the discount rate.
In words, the damage per acre at time (t) is the difference between the
net annual return from the land in its highest valued use given no pollution
(H) minus the value of the net annual return from the best crop that can be
grown given the chloride concentration at time (t), K [Cl(t)] . The magni-
tude of this net loss per acre is then discounted into present value terms
by the discount factor (e~rt) summed over all time periods (here assumed
to be infinity) and multiplied by N, the number of acres under cultivation.
The result is the total loss (D^) incurred by the farmer due to the pollu-
tion activities of the oil company.
The variable K[Cl(t)], i. e. , the net annual dollar returns to an acre
when employed in its highest valued use, given that the average chloride
concentration in the farmer's well during t is Cl, will decrease as Cl
increases. There are two basic ways for this to occur. First, as Cl
increases either the yields of the farmer's rice crops will decline or he
will be forced to substitute crops with a lower market value; either alter-
native means that K[Cl(t)] will decrease as Cl(t) increases. Second, the
farmer can continue to grow rice crops and maintain their yields by drill-
ing a new well, importing water, desalinizing his existing well, etc.
Each of these alternatives, however, will increase his costs, and conse-
quently K[Cl(t)] will still decrease as Cl increases.
Assuming that the farmer wishes to maximize the present value of his
farm, he will always minimize the damage that a given chloride concen-
tration in his well would cause him. He could do this by substituting
'^Conceivably H could also be made a function of t by forecasting future
changes in land use and commodity prices but this would require many
additional assumptions and projections and is independent of the main
problem at hand.
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crops, importing water, or some other best (least costly) available alter-
native. Thus, the farmer's self-interest dictates that he take that com-
bination of avoidance and abatement actions which minimizes the sum of
his avoidance, abatement, and damage costs.
The total damages sustained by the farmer for various chloride con-
centrations at his well are plotted in Figure 5. These increase at an in-
creasing rate as the chloride concentration increases because increases
in chloride concentration levels when those levels are still low will merely
cause crop yields to decline slightly while subsequent increases at higher
concentration levels will require high cost responses such as drilling a
new well, importing water, etc. Thus, the farmer's marginal damage
curve as a function of various chloride concentrations at his well will
also slope upwards as shown in 'Figure 6. Neither total nor marginal
damages is sustained, however, until a certain minimum threshold con-
centration of chlorides at the farmer's well is reached.
Most of the variables and parameters in Equation 1, from which the
total and marginal damages sustained by the farmer are calculated, would
not be known to either the farmer or the oil company when the farmer's
well becomes polluted. Their discovery would require appropriate mon-
itoring, groundwater quality modeling, and other information collection.
The Benefits Functions
While the farmer sustains damages as a result of the oil company's
polluting activity, the oil company derives an advantage, or benefit, from
engaging in that activity.
The oil company is assumed to conduct its operations so as to maxi-
mize its present discounted value (Ga) where
t=oo
Ga = / [R(t) - C(t)] e-rt dt (2)
t=0
and R(t) is the revenue obtained in time period t while C(t) is the inter-
nal costs it incurs in that time period (i. e. , exclusive of any external
costs it is imposing on the farmer). In maximizing its present discounted
value, the oil company is generating, however, a certain concentration
of chlorides at the farmer's well. This concentration is labeled R (not
to be confused with R(t) —-the oil company's revenues) in Figure 7. The
chloride concentration at the farmer's well can be reduced below R by
placing controls on the oil company's activities. It could, for exam-
ple, line its brine disposal pit with a nonporous material, deep-inject its
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TOTAL DAMAGES
TO FARMER, $
TOTAL DAMAGES CURVE
Cl CONCENTRATION, mg/l
Figure 5. Farmer's total damages function.
MARGINAL DAMAGES
TO FARMER, $
MARGINAL DAMAGES CURVE,
Cl CONCENTRATION, mg/l
Figure 6. Farmer's marginal damages function.
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PRESENT VALUE OF
OIL COMPANY, $
B, TOTAL BENEFITS
FUNCTION
Cl CONCENTRATION AT
FARMER'S WELL,
Figure 7. Oil company's total benefits function.
brine, or reduce the scale of its oil pumping operations. In any event,
reducing the chloride concentration at the farmer's well will increase the
oil company's costs or, possibly, decrease its revenues. In either case,
as shown in Figure 7, the company's present value will decrease as the
chloride concentration it generates at the farmer's well decreases. Since
the oil company is still assumed to maximize its present value subject to
the controls placed on it, the oil company will achieve any given level of
pollution at the farmer's well in the least-cost, most efficient way. If
the cost increases for successive unit increments of pollution reduction,
as is likely, the oil company's present value curve as a function of the
pollution it generates at the farmer's well will be shaped as shown in
Figure 7. If it is very costly for the oil company to reduce the pollution
it generates to low levels, in principle there is no reason why the total
benefits curve should not intersect the horizontal axis rather than, as
shown, the vertical axis. The associated marginal benefits curve is il-
lustrated in Figure 8. When the oil company takes no account of the pol-
lution it generates, it will generate pollution until the marginal benefit
it derives from increasing pollution has fallen to zero.
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Cl CONCENTRATION AT
FARMER'S WELL,
Figure 8. Oil company's marginal benefits function.
The Efficient Solution
The marginal benefits to the oil company and the marginal damages to
the farmer associated with the oil company generating various different
steady-state pollution concentrations at the farmer's well are combined
in Figure 9. Assuming that resources are efficiently allocated when so-
ciety's collective wealth is maximized, and ignoring the distribution of
wealth, the optimal level of pollution at the farmer's well would be OS,
where marginal benefits and marginal damages are equal. This is equiv-
alent to maximizing the net wealth of the oil company and the farmer who
jointly comprise "society" for the purposes of this analysis. OS is the
optimal level of pollution because any increase in pollution beyond that
level would impose greater additional damages on the farmer than it would
generate additional benefits to the oil company, and any decrease in pollu-
tion below OS would decrease the benefit to the oil company by more than
it would decrease the damages to the farmer. Since the current level of
pollution (OR) exceeds the optimal level of pollution (OS) then pollution
is excessive. If pollution is reduced from OR to OS, the gain to the farm-
er in terms of damage avoided is equal to area A plus B while the loss
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MARGINAL BENEFITS
AND DAMAGES, $
MARGINAL BENEFITS
FUNCTION
MARGINAL DAMAGES
FUNCTION
CONCENTRATION
OF Cl, mg/l
0 T S R
Figure 9. The efficient sofution.
to the oil company in terms of benefits foregone is area B. Thus, the
net gain to society would be (A + B) - B = A. The area under the mar-
ginal curve between any two chloride concentration levels (i. e. , the in-
tegral) is equal to the difference in the total damages and benefits (which
corresponds to that particular marginal) between those same chloride
concentration levels.
Achieving the Efficient Solution
Whether the efficient level of pollution (OS) could be achieved by the
farmer and the oil company negotiating a voluntary agreement depends
on two factors: (1) whether or not the two parties have well-defined prop-
erty rights in the groundwater underlying their land, and (2) their costs
of transacting an agreement. The transactions costs associated with ne-
gotiating an agreement are of two types. First, there are contract nego-
tiation costs proper. These include a variety of costs such as discovering
the extent of the harm or benefit which is going to be done as •well as how
much harm or benefit is to be exchanged. This can be defined as moni-
toring for information in order to discover the extent of the harm or bene-
fit. Second, there are costs for policing property rights because once
an agreement is reached, the parties must monitor the groundwater for
compliance, i. e. , keep track of what pollutants are being emitted and in
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what quantities, to ensure that the agreed upon amount of harm or ben-
efit is exchanged. These, information and compliance monitoring costs
are perhaps the most important component of transaction costs.
To illustrate the influence exerted by these two factors on whether or
not the optimum level of pollution will be achieved requires examination
of the case study using different specifications for property rights and
transaction costs. Assume that (1) both the oil company and the farmer
have well-established property rights in their groundwater, (2) their costs
of transacting an agreement are zero, and (3) they pursue a solution to
the pollution problem by negotiation. These assumptions are, of course,
unrealistic. Property rights to groundwater are often not well defined
and the costs of transacting (monitoring) a groundwater pollution agree-
ment would certainly not be zero. They can, however, be used to dem-
onstrate that the oil company and the farmer would come to a negotiated
agreement specifying OS as the level of pollution. *
The argument runs as follows. The area under the marginal benefits
curve (Figure 9), for a given level of pollution, represents the total gain
to the oil company. Similarly, for a given level of pollution the area un-
der the marginal damage curve represents the total damage incurred by
the farmer. If there is no negotiation the oil company will operate so as
to generate OR because at that level it will maximize the value of its ben-
efits in an amount equal to (B + C 4- D). However, at this level of pollu-
tion the damage to the farmer is (A + B + C). If the oil company reduces
the pollution it generates to OS the damage to the farmer will be reduced
by (A + B). The farmer would, therefore, be prepared to pay up to that
amount to reduce the pollution to OS. At this lower level of pollution the
loss to the oil company (in terms of gain foregone) would be B. Conse-
quently, the company would be willing to cut back to OS for payment of
slightly more than B. Since the farmer is willing to pay up to (A + B) for
a reduction to OS, and the oil company would be willing to cut to this level
for slightly more than B, the two parties will negotiate to cut the pollution
generated by the oil company to this optimal level. The precise amount
the farmer pays to the oil company in excess of the required minimum
(B) depends on the respective negotiating abilities of the two parties. Pol-
lution will not be reduced below OS because at lower levels the damages
avoided by the farmer would be less than the gain foregone by the oil com-
pany. Thus, the farmer's maximum offer for a further reduction in pol-
lution would be rejected by the oil firm.
*This solution through negotiation was first demonstrated by Coase (I960).
See Turvey (1963) as well for another informative discussion.
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Notwithstanding the existence of an externality, as long as the interact-
ing parties are willing to negotiate and can do so without cost, intervention
by the State is unnecessary to secure an optimum resource allocation.
However, the outcome when the State does impose on the oil company a
legal obligation to compensate the farmer for any damages it causes him
happens to be precisely the same. The total gain to the oil company for
being able to generate OS pollution is (D + C), whereas the total damage
to the farmer of OS pollution is only C. Thus, if the oil company is le-
gally liable to compensate the farmer, the company would be willing to
pay up to D + C for the privilege of generating OS pollution. The farmer,
on the other hand, would be willing to accept just C. The precise pay-
ment in excess of the minimum payment necessary (C) would again de-
pend on the negotiating skills of each party. The oil company will not pay
to increase the level of pollution beyond OS because the marginal damages
inflicted on the farmer that the oil company would become liable for would
exceed the marginal gains to the oil company.
The assignment of a legal duty to the oil company to compensate the
farmer does not affect the outcome, but only the distribution of wealth.
With no legal liability for the oil company to compensate the farmer, 'the
farmer will pay the oil company up to (A + B) to reduce the pollution it
generates from OR to OS; when the oil company does have a legal duty to
compensate the farmer, the oil company will pay up to (D + C) to gener-
ate OS pollution rather than no pollution.
Although the outcome under zero transactions costs is interesting to
consider, it is not realistic because transactions costs are not zero.
These costs may be quite substantial, not only because of legal fees and
negotiating costs, but because of the limited state of present knowledge.
In the present example the only information now known by the farmer is
that his well is polluted with brine water. He does not know whether the
cause is seawater intrusion, the polluting activity of the oil company, or
some other cause, and neither party knows the shape of the damage func-
tion. Faced with these uncertainties, and the reality that the well is con-
taminated, the farmer must gather information to (1) determine the cause
of such damages, and (2) determine the probable extent of such damages.
To accomplish each task the farmer must gather information through some
process of monitoring, modeling, and information collection—a process
that is certain to be very costly. Once this preliminary information is
collected the farmer can confront the oil company with a claim for esti-
mated damages plus a cease and desist order. The probable result is a
costly legal battle involving additional monitoring expenses to substantiate
conflicting legal claims.
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Since legal, negotiation, and monitoring costs may be substantial,
transactions costs will not be zero. In such circumstances, the above
conclusions cannot be guaranteed to hold and the solution when transac-
tions costs are positive must be examined. Recall that the oil company
is now generating pollution at the level OR and the farmer is being dam-
aged in an amount (A + B + C). The net gain to the farmer (and society)
of reducing the pollution to OS is equal to A. However, if the transac-
tions costs to the farmer of arriving at such an agreement (Tg) exceeds
A, he will not attempt to negotiate and in the absence of any further ini-
tiative on his part, the oil company will continue to pollute at level OR.
However, if there is an enforceable legal burden on the oil company, the
farmer can be expected to take action by filing suit against the oil com-
pany for damages and an injunction. Obviously, the oil company will
prefer to avoid the injunction and negotiate an agreement with the farmer
to pollute at level OS. However, if the transactions costs to the oil com-
pany of arriving at such an agreement (T^) exceeds D, the firm will not
attempt to negotiate and must therefore suffer the injunction.
Thus, if the oil company is liable for damages, the firm will generate
zero pollution whenever the cost of reaching agreement (T^) exceeds its
net gain (D) from reaching the agreement; similarly, if the company is
not liable for the damage it causes, it will generate OR pollution whenever
the farmer's cost of reaching agreement (Tg) exceeds his net gain (A)
from reaching such an agreement. Hence, large transactions costs are
likely to prevent negotiating the socially optimal level of pollution, and
lead to an inefficient allocation of resources. When, however, these
transactions costs do not exceed the potential net gain, an agreement
will be reached to operate at OS. If the oil company is liable its gain
will be (D - TA) instead of D, and if the company is not liable the farm-
er's gain will be (A - Tg) instead of A. In this situation, positive trans-
actions costs do not change the optimal level of pollution from OS—they
simply reduce the gains which result from polluting at this level.
If transactions costs are large enough to cause a suboptimal level of
pollution other than OS, the situation may be remedied by government
intervention. For example, government can induce a shift to the optimal
level by imposing an effluent charge on the oil company, equal to SU per
unit of pollution, or invoke other policies such as permits to achieve the
same result. The effluent charge will induce the oil company to cut back
its pollution from OR to OS because, for all levels of pollution greater
than OS, the marginal gain is less than the marginal cost per unit of
pollution.
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Thus, government has the power to induce an efficient allocation c
resources. However, government must estimate the marginal gain <.
damage curves before it can know the optimum, level of pollution and
termine the appropriate charge, again involving a great deal of costl;
monitoring and modeling. The cost to government of ascertaining th:
information and enforcing the implementation of any such policy will
probably be at least as large as it would be to the principals involved
there seems to be no a priori reason that government could reduce rt
toring costs.
Two Limiting Cases
The analysis presented in this section so far has dealt with the ge:
eral case. However, it is equally applicable to two limiting cases th
are of practical interest. First, it is quite possible that the efficien
solution is zero pollution. That is the result when the marginal dam
function exceeds the marginal benefits function at all levels of polluti
as in Figure 10. In practice, it is possible that such might be the si
tion where the polluter is emitting carcinogenic materials or heavy r
als into a community's drinking water supply. Second, it is also pos
ble that the efficient solution is to impose no standard at all. That ii
implication if the marginal damage function is everywhere zero and t
MARGINAL BENEFITS
AND DAMAGES, S
MARGINAL DAMAGES
FUNCTION
MARGINAL BENEFITS
.FUNCTION
CONCENTRATION
OF Cl, mg/l
0=S
Figure 10. First limiting case.
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contiguous with the horizontal axis as in Figure 11. In practice, it is
possible that such might be the situation where previous pollution has
already degraded the quality of an aquifer to such an extent that it is in
effect a "sink" and, as a result, additional effluents will not produce
additional damages.
With these principles concerning the establishment of the optimal
level of groundwater quality as background, Section IV considers the
issues specifically related to monitoring.
MARGINAL BENEFITS
AND DAMAGES, $
MARGINAL BENEFITS
FUNCTION
•MARGINAL DAMAGES
FUNCTION
CONCENTRATION
OF Cl, mg/l
R=S
Figure 11. Second limiting case,
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SECTION IV
MONITORING AND GROUNDWATER QUALITY STANDARDS
The primary purpose of this section is to analyze in the context of the
framework developed in Section III the problem of selecting a preferred,
or optimal, monitoring strategy under the assumption that the govern-
ment intends to combat the excessive pollution of ground-water by (1) set-
ting, and (2) enforcing groundwater quality standards by some form of
direct regulations involving discharge licenses or permits, although a
discharge license or permit procedure is not the only (or even necessan y
the best) way in which groundwater quality standards can be attained. I*1
principle, they can also be achieved by an effluent charges scheme or by
paying subsidies for effluent reductions. The problem is analyzed in the
context of a discharge licensing scheme because that is the option which
has been adopted by EPA (USEPA, 1974).
A secondary purpose is to discuss important institutional considera-
tions associated with implementing the preferred strategy selected, such
as who should do the monitoring and who should pay for it. In general,
these institutional considerations are embedded in the analytical discus-
sion although some are discussed separately.
DEFINITIONS OF INFORMATION AND
COMPLIANCE MONITORING
From an analytical point of view, it is convenient to divide monitoring
into two components—monitoring for information and monitoring for com-
pliance. In essence, monitoring for information is monitoring which is
undertaken for the express purpose of estimating the marginal gain and,
especially, the marginal damage function. Monitoring for this informa-
tion is prerequisite to setting an optimal groundwater quality standard
although groundwater quality standards may legitimately be set without
any assurance that they are optimal for reasons that are explained sub-
sequently.
Monitoring for compliance is that monitoring which is undertaken to
insure that the groundwater quality standard that has been established
is, in fact, adhered to. Since monitoring for information and monitor-
ing for compliance are analytically distinct, they are discussed separately*
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INFORMATION MONITORING
Information monitoring is designed to specify the damage function and
inform policymakers of the damages which will be avoided if the standard
is set at different levels.
The damage function (Equation 1) contains two terms; namely, H, the
highest valued use of the farmer's land, and K[Cl(t)], the value of the
farmer's land at time (tg) given some time profile of the chloride concen-
tration at his well over the period tg to t<». Since variable (H) is assumed
to be known, only the determination of K[Cl(t)]is related to monitoring.
To specify K.[d(t)]it is necessary to (1) estimate the reduction in crop
yields associated with different chloride concentrations and (2) estimate
the chloride concentration profile through time for different pollution
avoidance —abatement strategies. The function relating crop yields to
chloride concentration levels is a problem in agronomics, not monitor-
ing, so it need not be dealt with here. Of interest is the estimation of
the chloride concentration profile through time for different pollution
avoidance—abatement strategies which involves three activities: data
collection, groundwater flow modeling, and monitoring proper.
The place to start will always be with the estimation of the chloride
concentration profile in the absence of any pollution avoidance—abatement
action—i. e, , with the estimation of the solid curve labeled Clj in Figure 4,
To predict Cli (i. e. , the time-profile of chloride concentrations at
the farmer's well between discovery (t0) and the steady state (tg)in the
absence of any pollution abatement—avoidance steps being taken) it is
essential to employ some form of groundwater quality modeling technique.
In principle, this modeling process involves specifying the parameters
of a simulation model which is then used to estimate the properties of
the pollution plume over time. However, in practice, groundwater qual-
ity models vary from simple extrapolations based on experience and ex-
pertise to sophisticated computerized simulation models. Naturally, the
degree of effort expended on the flow model will depend on the serious-
ness of the threat posed by the pollution situation, but any technique of
quality modeling used will require input data. These data must either
be collected from existing sources or obtained by monitoring. Apart
from being a source of input data for the model, monitoring must also
be employed to check the accuracy of the groundwater flow model. The
sort of data that would have to be collected or generated in order to
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simulate Clj with any degree of accuracy using a sophisticated ground-
water quality model could include:*
• Data describing the geological column at both the oil com-
pany brine disposal pit and at the farmer's water well
• Brine pumping rates and brine concentration levels at
the pit
• Net groundwater recharge and water table levels during
the period in which the pit has been in existence
• Chloride concentration levels at the water well
• Past hydraulic head pressures
• Past rates of water withdrawal at the farmer's well
• The porosity, hydraulic conductivity, and saturated
thickness of the aquifer
• The mass per unit volume of the solution in the aquifer
under ambient conditions
• Relevant dispersion and diffusion coefficients
• Geographical data such as contour maps or simple topo-
graphical maps
• Statistics describing land use in the immediate vicinity.
To the extent that these data are not already available, it would be
necessary to determine exactly what needed data are missing, how to
procure them, and their acquisition cost. Since passage of PL 92-500
much of this information will be available at a lower cost than it would
have been prior to the passage of that legislation because Sec. 308(a)
states that "The Administrator . . . may at reasonable times have ac-
cess to and copy any records. " Thus, under the new law many of the
data required are more easily accessible. In fact, prior to the passage
of PL 92-500 the polluting agent almost certainly would have made infor-
mation to which it was privy available only after legal proceedings had
been implemented and the process of discovery instituted.
Having predicted Clj through a process of data collection, modeling,
and monitoring and, consequently, being able to estimate the level of
damages associated with the oil company's activities in the absence of
any abatement— avoidance actions, the next step would be to predict the
time-profiles of chloride concentrations associated with different abate-
ment—avoidance strategies using the groundwater flow model. The first
*See Finder (1973). In this article Finder simulates the areal distribu-
tion through time of groundwater contaminated by cadmium originating
at an aircraft plant on Long Island.
32
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obvious prediction would be that of C12, the time-profile of chloride con-
centration at the farmer's well if a "perfect" abatement technique such
as deep-injection of its brine is adopted by the oil company at to (see
Figure 4). Using this information, it would be possible to assess the
damages which would be experienced by the farmer even though a perfect
abatement technique were adopted immediately.
Analogously, other time-profiles of chloride concentrations at the
farmer's well between Clj and C12 would have to be predicted using the
groundwater quality model for less than perfect abatement—avoidance
strategies to obtain a reasonably complete picture of the overall marginal
damage function. However, the damages associated with Clj (no abate-
ment—avoidance) and C\2 (perfect abatement—avoidance) are most cru-
cial. If the difference between these two damage estimates is greater
than the cost of a perfect abatement—avoidance technique, then the per-
fect abatement—avoidance technique should be adopted because its cost
would be less than the damages which would be avoided (if the marginal
gain and marginal damage functions are not extreme). All other informa-
tion concerning the marginal damage function would be redundant. This
possibility corresponds to the first special case discussed at the end of
Section III, where the marginal damage curve exceeds the marginal curve
for all pollution levels. (As an aside, most discussions of pollution dam-
age occur in this context. That is, pollution damages are estimated in
terms of the existing level of pollution with the implication that these
damages could be avoided by reducing pollution to zero. (See for exam-
ple, U.S. Council on Environmental Quality (1971), Chapter 4.)
"Monitoring for information" is, then, an amalgam of data collection,
quality modeling, and monitoring used to predict the properties of the
pollution plume and estimate the damage function associated with the
source of pollution.
Although groundwater quality modeling is in its infancy, the discipline
is continuously advancing and such models are proving increasingly use-
ful for making predictions, especially in situations involving point sources
of pollution. However, as of now, such modeling is extremely costly be-
cause to be reliable it requires the procurement of a great deal of data
and the services of highly skilled experts in the areas of hydrology, geol-
ogy* programming, etc. Consequently, the possibility arises that the
cost of acquiring the information on the damage function (Mj) may ex-
ceed the cost of the damages which can be avoided by having that infor-
mation. This, of course, poses a real dilemma. However, through the
accumulation of experience concerning recurrent pollution situations and
reductions in the real cost of modeling that can be expected with the pas-
sage of time, such uncertainty can be expected to diminish.
33
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The problems associated with the estimation of damage functions of
groundwater pollution are not peculiar to that particular resource. Nu-
merous references attest to the difficulty of obtaining damage functions
for air pollution, ozone, and surface water discharges. See, for exam-
ple, Barrett and Waddell (1973), pp vii, 4, 24, and 28; Blower (1973);
Ridker (1967), p 153; and U.S. Council on Environmental Quality (1971),
pp 107 and 135. These references illustrate an official, and semiofficial,
awareness of the difficulty of estimating damage functions associated
with other environmental resources analogous to the difficulty of estimat-
ing damage functions associated with groundwater pollution.
COMPLIANCE MONITORING
Permit Terms
This section assumes that the data collection, quality modeling, and
information monitoring prerequisite to the estimation of the marginal
benefits and marginal damage functions illustrated in Figure 9 have been
accomplished and that the standard-setting authority has established an
optimal level of pollution of OS mg/1 of Cl at the farmer's well. This
level of pollution is associated with adoption of a given abatement tech-
nique by the oil company which, since OS is positive, is not perfect.
Some residual amount of chloride still finds its way into the groundwater
at the source, and chloride concentration at the farmer's well is a phys-
ical relationship established through the groundwater quality model.
Similarly, the model implies that if the residual percolation of brine at
the source is, say, X gallons per year (gpy) and that this will generate
OS'mg/1 of Cl at the farmer's well, it will also generate OS' mg/1 at some
point between the source and the farmer's well—for example, at the bound-
ary of the oil company's property.
From this it follows that a discharge permit issued to the oil company
that is designed to prevent violation of the OS level of pollution at the
farmer's well may have several dimensions. It may require that (1) the
oil company initiate the appropriate abatement technique, (2) the oil com-
pany not allow more than X gpy of residual brine to percolate to the ground-
water, and (3) the oil company not allow the chloride at its property line
to exceed OS'. In fact NPDES permits are frequently structured in this
way. See, for example, Application for NPDES Permit to Discharge
Treated Waste-Water to U. S. Waters. U. S. Environmental Protection
Agency, Region IV Application No. AL 074 OYM 2 000570. When a per-
mit is so structured, the permit dictates where monitoring may be under-
taken in order to insure compliance with its terms. This may involve
monitoring of all three of the restrictions listed above. If these permit
terms are not violated, then presumably the optimal pollution level of OS
at the farmer's well is not violated either.
34
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The Basic Principles
The example discussed in Section III illustrates the principles involved,
the essential elements of which are shown in Figure 9 (see page 24). It
will be recalled that if the oil company is not induced to recognize the
harm done by the chloride emissions it generates, it will operate so that
the chloride concentration its activities produce at the farmer's well is
equal to OR in Figure 9.
If a permitting agency issues a permit to the oil company to limit the
chloride concentration level at the farmer's well to the optimal level of
OS by specifying given abatement techniques, each of those conditions
imposed on the oil company implies an associated concentration limit at
the farmer's well. If the oil company meets the standard, the gain to so-
ciety is equal to area A minus the transactions costs (i. e. , monitoring
and other enforcement costs) that must be incurred in order to deter-
mine, and to obtain compliance with, the optimal standard OS regardless
of who does the monitoring. The cost to the oil company of compliance
with the standard OS is equal to B. Conversely, the gain to the oil com-
pany of noncompliance is B while the cost to society would be A + M, the
transactions costs. (M might be zero if no effort were made to enforce
compliance. However, M might be positive if some transactions (moni-
toring) costs are incurred but compliance is still not achieved. ) In this
case it is assumed that the permittee oil company will comply with the
terms of its permit only if the expected cost of noncompliance exceeds the
cost of compliance and will not comply if the expected cost of noncompli-
ance is less than the cost of compliance, although it is recognized that
not all permittees are entirely selfish and thus will not automatically vio-
late the terms of their permits for economic reasons. The problem in
such circumstances is analyzed subsequently in the subsection Permittee's
Optimal Violation. It transpires that no substantive modification of the
analysis is required.
The Expected Cost of q Standards Violation
This subsection treats criminal behavior as a rational reaction to the
costs and benefits that the criminal subjectively estimates to be associated
with his decisions, not as some form of social or psychological deviancy.
It is in the vein, therefore, of the modern economic approach to criminal
activity originally developed by Becker (1968 and 1974) and pursued by
Stigler (1970) and Ehrlich (1973 and 1975).
The expected cost to a permittee of violating a standard is equal to
E(C) = Pd • Pc ' E(F) (3)
35
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where PJ is the probability of detecting violation of the standard. Pc is
the probability of conviction for the violation, given its detection, and
E(F) is the expected fine, given conviction. A few observations are in
order. First, since E(C) is multiplicative in its arguments, if Pj, Pc»
or E(F) is zero, then E(C) will be zero. A violation will therefore occur.
Second, the arguments of Equation 3 can be traded off against each other.
Any given expected cost level can be maintained by increasing one argu-
ment and appropriately decreasing another argument. Third, even if the
probabilities of detection and conviction are one (unity), the expected cost
of violating the standard could still be less than the expected gain from
such a violation if the expected fine is small enough.
It is apparent that the EPA's water quality strategists are cognizant
of this problem since they have stated that the "EPA considers the mag-
nitudes of the fines that it intends applying as a major economic lever to
assure compliance. " (USEPA, 1974). Frequently in the past, it was cheaper
to pay a small fine than to install and operate control equipment. Now
PL 92-500 (Section 309(c)(l)) provides that "Any person who willfully or
negligently violates . . . any permit condition or limitation . . . shall be
punished by a fine of not less than $2500 nor more than $25,000 per day
of violation . . . . "
Section 1423, (b)(2) of the Safe Drinking Water Act provides for simi-
larly stiff penalties. "Any person who violates any requirement of an ap-
plicable underground injection control program to which he is subject . . •
(A) shall be subject to a civil penalty of not more than $5,000 ... or (B)
if such violation is willful, such person may, . . . , be fined not more
than $10,000 for each day of such violation. "
Fines in the upper ranges of those allowed by PL 92-500 and PL 93-523
have the potential to make the expected cost of a standards violation high
ji the probabilities of detection and conviction are not trivially small. How-
ever, as reported, the EPA's administration of the Law has the effect of
decreasing the severity of a fine. According to R. Johnson, Acting EPA
Administrator for Enforcement, in a speech before the Practicing Law In-
stitute on February 14, 1975, that appeared in the February 21, 1975,
issue of Environmental Reporter, the EPA intends to follow generally a.
four-step approach in enforcing compliance schedules set forth in the Na-
tional Pollution Discharge Elimination System permits. First, the EPA
will telephone a discharger found to be in violation of the compliance sched-
ule written into his permit. Next, EPA will send a letter to the discharger*
and this will be followed by an administrative order if noncompliance per-
sists. The final step, according to Johnson, would be court action; only iH.
serious violations will EPA bypass these steps and go directly to court.
Clearly, if this procedure is followed its de facto effect is to reduce any
expected fine below the de jure level of fines. (Emphasis added. )
36
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The probability of conviction (given detection) is treated as an exoge-
nous variable in this report since to explore the reasons why detection of
an offense sometimes does, and sometimes does not, lead to a conviction
would be tributary to the main purpose of this report. For concreteness,
and without loss of generality, the specific exogenous value given as Pc
is assumed to be one (unity).
The Probability of Detection Function
The probability of being detected violating a groundwater quality stand-
ard is a function of the amount of compliance monitoring undertaken—as
measured, say, by expenditure on compliance monitoring—and the sever-
ity of the violation. Thus, the probability of detection function is
Pd=f(Mc,V) (4)
where MC is the expenditure on compliance monitoring and V is the size
of the violation as measured by the difference between the actual level of
pollution emitted and that allowed by the standard. In addition, it is as-
sumed that
while
SPd
> 0 and
The positive first derivative with respect to Mc for this probability-
of-detection function indicates that Pd increases monotonically with MC
while the negative second derivative indicates that it does so at a decreas-
ing rate. This is based on the presumption of diminishing returns to moni-
toring. Mc might be zero if no effort were made to enforce compliance,
or positive if some monitoring costs are incurred but compliance is still
not achieved.
Graphically, Pd as a function of MC would appear as in Figure 12.
The curve increases monotonically and asymptotically approaches unity.
The curve is drawn for a given size of violation. The solid curve labeled
Pd is predicated on the assumption that the size of the violation is equal
to Vj. If the size of the violation increased to V2, then the whole curve
would shift up to Pd' because the first derivative of Pd with respect to
V is positive. Figure 12 also assumes that any given level of compliance
37
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PROBABILITY OF
DETECTION,
COMPLIANCE MONITORING
Figure 12. The probability of detection function.
monitoring expenditure which is undertaken is allocated over the monitor-
ing techniques relevant to the pollution situation in such a way as to max-
imize the probability of detection for that level of expenditure. The prin-
ciples governing this allocation are discussed in the following subsection.
The dependence of Pjj on V can be clarified by reference to Figures
13 and 14. In Figure 13, if the permittee operated so as to generate a
level of pollutants equal to OU, he would be guilty of a violation of the
standard by an amount of (OU-OS) = V. The gain to the permittee of such
a marginal violation is equal to Dj.
Figure 14 can be used to explain that, for a given monitoring expendi-
ture, the probability of detection of a violation of the standard will increase
as the severity of the violation V increases (i. e. , dP
-------
MARGINAL BENEFITS
FUNCTION
MARGINAL DAMAGES
FUNCTION
POLLUTION LEVEL
(mg/l OF Cl)
Figure 13. The gain from a standards violation.
Figure 14. Detection and the size of the violation.
39
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pollution part of the plume is between Wells A and B. Wells A and B are
yielding readings of 250 mg/1, and thus do not indicate that the permittee
is violating the standard with a concentration of 500 mg/1 over a large
area beyond his property boundary. If he increases the severity of his
violation by emitting more pollutants from P, then the plume will expand,
the 300 mg/1 isopollution contour will arrive at Well A or B, and a vio-
lation will be detected. Thus, the probability of a violation being detected
increases as the severity of the violation itself increases.
There seems to be no good reason to suppose that this probability of
detection would increase at either an increasing or decreasing rate as the
severity of the violation increases. Consequently, the second derivative,
d2P(j/dV2, is postulated to be zero. (Nothing substantive in the analysis
which follows would be affected if the second derivative were either posi-
tive or negative. Only the indisputably positive first derivative is essen-
tial to the analysis. ) Since the probability of detection would quite obvi-
ously be zero when V is zero, it may be inferred that the probability of
detection will increase in proportion to the size of the violation. Graph-
ically, therefore, when P
-------
PROBABILITY OF
DETECTION, Pd
1.00
SEVERITY OF
VIOLATION, V
(mg/l OF Cl)
Figure 15. The probability of detection and the severity of the violation.
various locations and various frequencies. The feasible set of monitor-
ing strategies consists of all possible combinations of monitoring tech-
niques applied at all possible intensities.
Associated with each monitoring strategy within the feasible set of
strategies is a certain probability of detection. The "output" of differ-
ent quantities of compliance monitoring undertaken is different proba-
bilities of detection. In order to maximize the probability of detection
from a given monitoring budget, the efficient monitoring strategy to adopt
is that associated with an allocation of the budget such that the increase
in the probability of detection per dollar allocated to one monitoring tech-
nique is equal to the increase in the probability of detection per dollar
allocated to any other feasible monitoring technique. (For any given
probability of detection, following this rule will lead to a minimization
of monitoring expenditures. )
If such a budget allocation is followed and there are diminishing re-
turns to compliance monitoring, then the marginal cost of such monitor-
ing as a function of the probability of detection will increase. Graph-
ically, the marginal cost of monitoring as a function of the probability of
detection will appear as in Figure 16.
41
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MARGINAL COST, $
MARGINAL COST OF
COMPLIANCE MONITORING,
PROBABILITY OF
DETECTION, Pd
1.00
Figure 16. The marginal cost of compliance monitoring.
Implications of Independent versus Audited
Self-Monitoring
The probability-of-detection function is independent of who does the
monitoring, i. e. , whether monitoring is done by some independent age
or whether self-monitoring subject to independent audit is the adopted
practice.
By definition, independent monitoring is monitoring done by anyone
but the permittee. Usually, it would be done by the permit issuing agency*
but it could be delegated to some other body (except the permittee). °e
monitoring that is subject to audit is monitoring generally done by the
permittee but where the permit-is suing agency reserves the right to con
duct audit monitoring to ensure the integrity of the data collected. Both
the Federal Water Pollution Control Act and the Safe Drin^np; Water^Act.
envisage self-monitoring backed up by audit monitoring. For example,
Section 308(a)(4) of PL, 92-500 states:
(A) The Administrator shall require the owner or operator
of any point source to (i) establish and maintain such records,
(ii) make such reports, (Hi) install, use, and maintain such
monitoring equipment or methods . . . , (iv) sample such
effluents (in accordance with such methods, at such locations,
42
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at such intervals, and in such manner as the Administrator
shall prescribe) . . . ; and (B) the Administrator . . . (i)
shall have a right of entry to ... any premises in which an
effluent source is located. . , , and (ii) . . . have access to
records, . . . monitoring equipment . . . , and sample any
effluents . , .
Analogously, Section 1445 of the Safe Drinking Water Act states;
(a) Every person who is a supplier of water . . . shall es-
tablish and maintain such records, make such reports, con-
duct such monitoring, and provide such information as the
Administrator may reasonably require . . . (b)(l) . . . the
Administrator ... is authorized to enter any . . . property
... [in order to audit] records, files, papers, processes,
controls, and facilities . . .
The functional relationship between the probability of detection of a
standards violation and the amount of monitoring undertaken when the
party to be monitored does the basic monitoring, but is subject to audit,
does not differ substantively from that of independent monitoring. This
can be illustrated by the isopollution contour and monitoring well situa-
tion of Figure 14. The readings of wells A and B do not indicate to the
permitting authority that a violation of the standard is occurring because
a chloride concentration of 500 mg/1 exists over a large area outside the
permittee's property boundary. Clearly, the probability of this violation
being detected would increase if additional expenditures on monitoring
were incurred to sink more wells, especially between A and B.
If self-monitoring subject to audit is substituted in this situation, the
permit-issuing agency would make as a condition of its permit issuance
that the permittee himself sink wells at A, B, and C and report the re-
sults of samples taken therefrom to the agency. The integrity of their
results would be preserved by the agency's random audit activities. How-
ever, once again, the standards violation which is occurring would not be
detected by samples from A and B, and the probability of such detection
would increase if the agency imposed on the permittee the obligation to
sink more monitoring wells along its boundaries.
If the monitoring burden is placed on the permittee, the permit-issuing
agency may be tempted to regard monitoring as a free good since it does
not come out of its budget. This distinct possibility of a temptation to
impose "over-monitoring" when self-monitoring subject to audit is the
chosen modus operandi arises because of the incentive system inherent
in the institutional structure of the situation. However, the objective of
43
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compliance monitoring should not, in general, be to maximize the proba-
bility of detecting a standards violation. To make this probability arbi-
trarily close to unity, monitoring wells would have to be sunk arbitrarily
close together along the permittee's property line at great expense. Thus,
the gain to society in enforcing the standard would, if the objective of max-
imizing the probability of detecting a standards violation were adopted, be
dissipated in monitoring expenditure. If wealth maximization is society s
goal, monitoring should be undertaken to ensure compliance with a stand-
ard only to the extent that the gain to society (which has, in terms of Fig-
ure 9, a maximum value of $A) is in excess of the monitoring expenditures*
($M) necessary to enforce compliance. However, the permit-issuing agency
may perceive its function as maximizing the number of standards viola-
tions detected since these are immediately visible, whereas the more re-
mote, but appropriate, goal of an overall improvement in society's wel-
fare would not be so obvious. While some constraint would be imposed on
the monitoring activities undertaken by the permit-issuing agency if they
had to be financed from its own budget, no such constraint exists when they
are financed by the permittee. This argument is not, of course, suffi-
cient to justify independent monitoring to the exclusion of self-monitoring
subject to audit because there are other reasons why the latter might be
advocated. The most important of these is that self-monitoring subject
to audit may be the least expensive per unit of monitoring.
Although it is not reasonable from society's point of view to equate the
detection of a violation obtained by monitoring with the benefit of that
monitoring program, others have erroneously done so. Ward and Vander-
holm (1973), p 543, for example, state that "Figure 2 illustrates the rela-
tionship between effort expended [annual cost of monitoring] and benefits
gained [percentage of spills detected] . . . . " Moreover, and highly sig-
nificant given the above strictures, they continue, "the information pre-
sented [in Figure 2] answered the water-quality manager's question, ho
much effectiveness am I [sic] getting for my money. "
Expected Fine Function
This section previously noted that PL 92-500 and PL 93-523 contain
statutory scales of fines for water-quality violations. These scales of
fines are exogenous variables whose upper bound is indicated in Figure
17 by Fmax . However the expected fine is not an exogenous variable,
but a function of the severity of the violation as is apparent from the re-
marks of Richard Johnson, Acting EPA Administrator for Enforcement.
Therefore, the following expected fine function is postulated:
E(F) = J(V) (5)
44
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SEVERITY OF
VIOLATION, V
(mg/l OF Cl)
Figure 17. The expected fine and the severity of the violation.
with
dCE(F)]
d2[E(F)]
>o .
The signs of these derivatives are imposed to indicate what might be as-
sumed to be plausible judicial attitudes; namely, that the size of the fine
will be increased as the severity of the violation increases and at an in-
creasing rate. (Less confidence can be placed in the sign asserted for
the second derivative, but it is not crucial to the analysis. )
The expected fine as a function of the severity of the violation is illus-
trated graphically in Figure 17. The maximum violation that the permit-
tee will perpetrate is SR. The courts may, or may not (as, in fact, illus-
trated), impose the maximum fine before this violation is reached.
45
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Expected Cost of Violating a Standard, Compliance
Monitoring Expenditures, and Size of Violation
By substituting Equations 4 and 5 into Equation 3 we find that:
E(C) = f(Mc, V) • Pc - j(V) (6)
= f(Mc, V) • j(V)
since the probability of conviction is assumed equal to unity. The func-
tion of Equation 6 relating the expected cost of violating a standard to the
expenditure on monitoring for a given size violation (V) is simply a scalar
transform of the function relating the probability of detection to the ex-
penditure on monitoring (Figure 12). Thus, it will share the properties
of increasing monotonically at a decreasing rate while asymptotically
approaching the expected fine (E(Fj)) for that size violation. That is,
and < o
Such a function is illustrated by the solid curve in Figure 18. The broken
curve indicates the situation if the size of the violation is larger.
The function relating the expected cost of violating a standard to the
degree, or severity, of that violation (for a given level of expenditure on
compliance monitoring) will emanate from the origin, be convex from be-
low, and terminate at Fmax (the maximum fine) — as shown by the solid
curve in Figure 19. The shape of this curve is dictated by the shape of
the function of Equation 5 since the probability of detection is assumed to
be proportional to the size of the violation (see Figure 15). The broken^
curve in Figure 19 indicates the situation if the level of compliance moni-
toring undertaken was increased from, say, M* to M2..
Permittee's Optima! Violation
The permittee's total benefits function with respect to the chloride con-
centrations imposed on the farmer's well is discussed in Section III and
illustrated in Figure 7. That part of the total benefits function which ex-
ceeds OS chloride concentrations (the standard) is shown in Figure 20.
It increases monotonically between S and R where it reaches a maximum,
which is the chloride level the permittee will generate if no attempt is
made to regulate his activities. Thus, algebraically, the permittee's
total benefit as a function of the size of his violation of the standard is
given by
46
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EXPECTED COST
E(C), $
E(F,)
'E(C)' FOR V=V,
COMPLIANCE MONITORING
EXPENDITURE, $
Figure 18. The expected fine and expenditure on compliance monitoring.
SEVERITY OF
VIOLATION, V
(mg/l OF Cl)
Figure 19. The expected cost and the severity of the violation.
47
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B = g(V) ; -f£ >0 , 2-5- <0 . (7)
Figure 20 also includes the permittee's expected cost as a function of
the size of his violation for a given scale of fines and level of monitoring
(taken from Figure 19).
The permittee's total benefit and expected cost functions can be used
to establish the level of emissions that it is optimal for the permittee
to generate and, therefore, the optimal severity of the standard violation
for the permittee to undertake. The assumed objective is to choose V so
as to maximize net expected gain (H) where H is defined to be the differ-
ence between total benefits and expected cost. That is, the permittee is
to maximize H = B - E(C). Diagrammatically, this occurs at Vj_ where
the slopes of the total benefit and expected cost curves are equal. Ana-
lytically, the maximum occurs when the marginal benefit from increasing
the violation is equal to the marginal expected cost from increasing the
violation.
Up to this point the analysis assumes that the sole objective of the per"
mittee is to maximize the permittee's net expected gain (even though that
involves illegal activities). On this basis Vj_ in Figure 20 is the permit-
tee's optimal violation in that it maximizes net expected gain after allow-
ance is made for the expected cost of the standards violation. However,
the permittee may also derive disutility from engaging in illegal activities
(i. e. , violating a legally promulgated groundwater quality standard), which
introduces the consumption of nonpecuniary goods into the utility function.
(This analytical innovation was pioneered by Becker (1957). In addition,
see Williamson (1963 and 1964), and Alchian (1965).) Essentially, the
permittee has indifference curves like those illustrated in Figure 21,
which show a diminishing marginal rate of substitution between the net
expected gain and illegal activities. 113 is preferred to U2 and 1^2 to
because for a given net expected gain equal to IIj a larger violation
must leave the permittee with a lower level of utility than a smaller vio-
lation (Vj). Analogously, for a given violation (V^) a higher level of net
expected gain dI2) must generate a higher level of utility for the manager
than a smaller level of wealth (II j). Completely unscrupulous permittees
would have horizontal indifference curves; completely scrupulous permit-
tees would have vertical indifference curves.
The permittee's opportunity set under various conditions is illustrated
in Figure 22. The XX curve illustrates the net expected gain from the per*
mittee1 s activity as a function of the pollution generated when no ground-
water quality standards must be met. Wealth is maximized at II where
the level of pollution generated is R0 The effect of the imposition of
48
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TOTAL BENEFIT AND
EXPECTED COST OF
VIOLATION, S
max
TOTAL BENEFIT, B
SEVERITY OF
VIOLATION, V
(mg/l OF Cl)
Figure 20. The optimum violation.
IT, NET
EXPECTED
GAIN
U,
SEVERITY OF
VIOLATION, V
(mg/l OF Cl)
~ V, V2 R
Figure 21. The preference function.
49
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NET EXPECTED
GAIN, $
SEVERITY OF
VIOLATION, V
(mg/l OF Cl)
Vi
Figure 22. The revised optimum violation.
standards is to shift the net expected gain curve downwards everywhere
to the right of the standard (S) as illustrated by curve XY with a maximum
between S and R.
As long as illegal activities do not generate disutility, wealth is maxi-
mized at n2 where the violation undertaken is Vj. This is where XY is
tangential to the highest horizontal indifference curve (not shown). As an
aside, where the permittee is completely scrupulous the optimum viola-
tion is zero. This is where XY crosses the vertical axis. Here it inter-
sects the highest indifference curve (not shown) at a corner solution. The
net gain generated is EN.
If, however, illegal activities do generate disutility, the violation whic"
maximizes permittee utility is Vj where XY is tangential to the UU indif-
ference curve. Since UU slopes upward from left to right, the optimum
violation (V\) when illegal activities do generate disutility must be less
than the optimum violation (Vj) when illegal activities do not cause disutil-
ity. The substantive implication of recognizing that a permittee may de-
rive disutility from engaging in illegal activities is minimal; the only effect
is to reduce the size of the optimal violation. Since this makes no differ-
ence to a purely qualitative analysis such as this, the remainder of the
50
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analysis assumes for simplicity that a permittee does not derive any dis-
utility from illegal activities.
Since the effect of additional compliance monitoring expenditure is to
increase the slopes of the expected cost function, this would make the
slopes of the permittee's total benefits and expected cost curves (see
Figure 20) equal at a lower value of V. Consequently, the permittee's
optimal violation will decrease as expenditure on compliance monitoring
increases. If expenditure on compliance monitoring is increased suffi-
ciently, the permittee's optimal violation will enventually become zero.
This occurs when the slope of the permittee's expected cost curve ex-
ceeds that of his total benefits curve for all V —i. e. , when the marginal
benefit from a violation is less than the marginal expected cost for all
violations. Although it is possible to reduce the permittee's violation to
zero by increasing compliance monitoring expenditures, it may not be
optimal from society's point of view to do so, depending on the social
gains and losses associated with monitoring.
Optimal Compliance Monitoring Expenditure
The marginal cost of compliance monitoring is a function of the prob-
ability of detection (the "output" of compliance monitoring). The optimal
expenditure on compliance monitoring will be that level of expenditure
for which the marginal cost is equal to the marginal benefit derived.
Since a permittee's optimal violation of a standard will decrease as the
expenditure on compliance monitoring increases and vice versa, this al-
lows establishment of the functional relationship between expenditure on
compliance monitoring and the social gain from that expenditure.
The social gain from monitoring is defined to be the social loss avoided
by that monitoring. To illustrate this, consider Figure 23. If no monitor-
ing is undertaken, the expected cost to the permittee is zero and he will
produce OR pollutants at the farmer's well. In terms of Figure 20, the
expected cost function is contiguous with the horizontal axis (i. e., zero)
and thus the net expected gain (H) is maximized at T. The loss to society
is equal to the area bounded by the marginal damage and benefit functions
between S and R (amount A). If sufficient monitoring is undertaken to re-
duce the permittee's violation by one unit (to SRj), the loss avoided is
given by area (Tj). Analogously, if enough additional monitoring is under-
taken to reduce the violation by one more unit (to SR2), the total loss
avoided is given by area (Tj + T£) and the marginal loss avoided by area
(T2). Thus the total loss avoided increases as the violation decreases and
it does so at a diminishing rate towards a maximum equal to A (which oc-
curs at zero violation—see Figure 24. )
51
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BENEFITS,
DAMAGES, $
MARGINAL DAMAGES
FUNCTION
MARGINAL BENEFITS
FUNCTION
POLLUTION LEVEL
(mg/l OF Cl)
Figure 23. The benefits from violation reduction.
SOCIAL LOSS
AVOIDED, $
SEVERITY OF
VIOLATION, V
(mg/l OF Ct)
Figure 24. Diminishing returns to violation reduction.
52
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The relationship between various levels of probability of a violation
being detected and the total social loss avoided may be inferred from Fig-
ure 25. The upper left quadrant shows the relationship between the prob-
ability of detection and expenditure on monitoring. The lower left quad-
rant shows the expected cost of a violation to the violator as a function of
the probability of detection—which, from Equation 1, is a proportional
relationship. The lower right quadrant shows the violation as a function
of the expected cost. This relationship shows that as the expected cost
of a violation increases due to an increase in the probability of detection
brought about by additional compliance monitoring, the optimal violation
decreases but at a diminshing rate (this relationship may be inferred from
both Figure 20 and the derivatives of Equations 5 and 7). Finally, the upper
TOTAL SOCIAL
LOSS AVOIDED
PROBABILITY OF
DETECTION, P,
EXPENDITURE ON
COMPLIANCE
MONITORING
NOTE:
ALL AXES ARE POSITIVE
EXPECTED COST, E(C)
Figure 25. Compliance monitoring and the total social loss avoided.
53
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right quadrant shows the relationship between the violation and the social
loss avoided. There is no connection between the upper left and the upper
right quadrants. This is indicated by the two separate vertical axes — one
measures expenditure on compliance monitoring; the other measures the
social loss avoided.
To establish the relationship between the probability of detection and
the total social loss avoided, assume that the expenditure on monitoring
1 ^ *
is increased from M£ to M£ in order to increase the probability of detec-
tion by one unit from P^ to P,. This increases the expected cost from
E(C)1 to E(C)2 which decreases the optimal violation from V^ to V2. As
a result the total social loss avoided increases from L]_ to L^. If expen-
diture on monitoring is increased to M^, probability of detection is in-
creased by one more unit and the total social loss avoided increases from
L«2 to 1,3. While the total social loss avoided increases as the probability
of detection increases, it does so at a diminshing rate (because L,^-Li2 *-s
less than L^-Li). Thus, the relationships between total social loss avoided
and the probability of detection (i. e. , the total benefit from compliance
monitoring) and the marginal social loss avoided and the probability of
detection (i. e. , the marginal benefit from compliance monitoring) will ap-
pear as in Figure 26 and 27, respectively.
Figure 28 combines both the marginal benefits curve from expenditure
on compliance monitoring and the marginal cost of compliance monitoring
(illustrated in Figure 16). The optimal probability of detection is that
probability where marginal benefit is equal to the marginal cost, i. e. ,
where the two curves intersect at
Once the optimal probability of detection to aim for is established the
optimal expenditure on compliance monitoring may be inferred. (See the
discussion contained in preceding subsection, "Monitoring for Compliance,
and Figure 12. ) This identifies the optimal compliance monitoring budget.
The optimal monitoring strategy (i. e. , combination of monitoring tech-
niques) may also be inferred because a unique monitoring strategy is as-
sociated with each level of probability of detection.
The optimal detection probability is not, in general, that which would
induce perfect compliance with the standard. This is because it pays
society to undertake additional compliance monitoring that pushes a per-
mittee closer towards total compliance with the standard only so long as
the incremental gain to society exceeds the incremental cost of the addi-
tional monitoring required. Thus, it should not be surprising to see mar-
ginal violations of quality standards. To use a rather precise analogy,
the maximum highway speed limit is a standard which is enforced by po-
licing the highways. The highways could be policed so intensively that
no one would exceed the speed standard. However, they are not because
54
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TOTAL SOCIAL GAIN
FROM MONITORING
(i.e., LOSS AVOIDED), $
TOTAL BENEFIT CURVE
FOR COMPLIANCE
MONITORING
PROBABILITY OF
DETECTION, Pd
Figure 26. The total benefits from compliance monitoring.
MARGINAL SOCIAL GAIN
FROM MONITORING (i.e.,
LOSS AVOIDED), $
MARGINAL BENEFIT CURVE FOR
COMPLIANCE MONITORING
PROBABILITY OF
DETECTION, Pd
Figure 27. The marginal benefits from compliance monitoring.
55
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MARGINAL SOCIAL GAIN
(i.e., LOSS AVOIDED),
AND COSTS, $
MARGINAL BENEFIT OF
COMPLIANCE MONITORING
MARGINAL COST OF
COMPLIANCE MONITORING
PROBABILITY OF
DETECTION, Pd
Figure 28. The optimal probability of detection.
the marginal social cost of such an increase in policing intensity would
exceed the marginal social benefit obtained from deterring the relatively
few persons who speed.
Monitoring Priorities
Figure 28 may be used to illustrate the issues involved in establishing
monitoring priorities. Greater marginal benefits from compliance moni-
toring (for given marginal costs) will increase the optimal probability ol
detection. This depends on the social loss avoided through monitoring
which, in turn, depends on the difference between the marginal damages
and the marginal benefits associated with a certain level of pollution.
The larger the difference between the marginal damages and marginal
benefits from pollution, the higher the optimal detection probability and
consequent expenditure on compliance monitoring should be. This infer-
ence is consistent with the notion that the larger the threat posed by a
pollutant the stricter the standard imposed should be, and the more assid-
uously the situation should be monitored in order to assure standard com-
pliance. Thus, if the marginal cost of monitoring is the same for dif-
ferent pollution situations, then those situations can be ranked according
to the threat that they pose for society.
56
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Conversely, the optimal probability of detection will increase with
lower marginal costs of monitoring (for given marginal benefits). Thus,
different pollution situations that pose an equal threat to society can be
prioritized by ranking them according to the marginal cost of monitoring
them. The lower the marginal cost, the higher the probability of detection
which should be aimed for and the larger the fraction of the total expendi-
ture on monitoring which should be allocated to those cases. Considera-
tions such as these argue for a greater allocation of monitoring expendi-
tures to point sources as opposed to nonpoint sources (such as sewer lines,
agricultural runoff, etc. ) since the former have lower marginal costs of
monitoring than the latter.
Corruption
Although the objective analysis of dishonesty may be distasteful, this
does not make dishonest behavior any less prevalent. Regrettably, gov-
ernment regulations are sometimes broken either willingly or on payment
of a bribe (perhaps disguised as a wage premium). Even more regret-
ably, it is not unknown for government employees (cloaked as "inspec-
tors" or "monitors") to collude in the violation of regulations.
To this point the analysis has assumed that when it is beneficial for a
permittee to violate a groundwater quality standard he will do so with im-
punity. This assumption implies that the permittee's employees obey the
permittee's directions even when they are illegal, but it is highly likely
that some of the employees will balk at taking actions which they know to
be illegal. One of the permittee's options if he is faced with a recalci-
trant employee might be to fire him and replace him with a more trac-
table employee. It is to prevent such blatant victimization of honest em-
ployees that the Federal Water Pollution Control Act states, in Section
507(a), that "No person shall fire, or in any other way discriminate
against . . . any employee (who) . . . caused to be filed . . . any pro-
ceeding under this Act. . . " If, after an investigation and hearing, a
fired employee is vindicated, the permittee may be enjoined to reinstate
the employee with retroactive pay and compensation for costs and ex-
penses in filing the complaint. (PL 92-500, Section 507(b).) As an aside,
such a weak protection clause would not seem to provide much incentive
for employees to assist in enforcement of the law.
The permittee's second alternative is to move a recalcitrant employee
to other activities and replace him with a more tractable employee. Pre-
sumably, if the employee were not demoted he would find it difficult, and
would have little incentive, to prove "discrimination. "
57
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Up to now it has been implicitly assumed that the permittee's employ-
ees would willingly follow the permittee's directions even though that
meant breaking the law, or that he was able to replace recalcitrant em-
ployees with tractable substitutes, without incurring any additional costs.
In a competitive job market this might prove to be close to the truth,
especially when adherence to the standard itself would, if anything, tend
to make jobs scarcer by reducing the optimal scale of the permittee's
activity. The possibility of quality standards adversely influencing em
ployment opportunities is recognized in Section 507(e) of PL 92-500, \
states that "The Administrator shall conduct continuing evaluations of
potential loss or shifts of employment which may result from the issuance
of any effluent limitation . . . including . . . investigating threatened
plant closures or reductions in employment ..." However, it is possi-
ble that none of the permittee's employees would be willing to violate the
law without additional compensation. Thus, the permittee's third option
is to pay employees a wage premium (i. e. , a bribe) in order to induce
them to implement the standard violation he has decided upon. It is plaus
ible to assume that this bribe would be an increasing function of the size
of the violation desired by the permittee. That is,
SB,
Bj = ' •""
where BI is the cost of the bribe to the permittee. Addition of this cost
to the permittee's other expected costs, as given by Equation 6, results
in
E(C) = f(M,V) • j(V) + h(V) . (9)
Instead of the original expected cost curve shown in Figures 19 and 20,
there would be a new curve everywhere above the original curve and di-
verging from it as V increases (i. e. , with a greater slope at any V than
the original curve), with the implied optimal violation less than Vj.
Apart from this minor modification, none of the previous analysis is al-
tered by making allowance for the permittee to bribe employees to vio-
late groundwater quality standards. In fact, even this minor modification
does not arise if the required_bribe is not a function of the size of the vio-
lation but is a fixed amount (Bj) independent of the size of the violation.
If this is the case, then the cost curves in Figures 19 and 20 shift up by ^
BI without changing their slope and, therefore, without changing the opti-
mum violation (Vj). The only effect in this situation is on the distributi°n
of the permittee's gain. The permittee would now retain only B - BI
while "Bj would be transferred to his employees.
58
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While it is not common for government employees to collude in the vio-
lation of regulations they are supposed to enforce, it is not unknown. Thus,
for completeness1 sake the analysis should consider what would happen
if the government employee responsible for enforcing compliance is
corruptible.
It seems plausible that the bribe demanded by the government "moni-
tor" B2 would be an increasing function of the violation proposed by the
permittee. Thus,
B2 = k(V) ;
In general, it must be assumed that employees would continue to require
bribing to violate standards notwithstanding collusion by the government
monitor. Thus, the permittee's new expected cost function is given by
E(C) - h{V) +k(V) . (11)
In this new expected cost function the first multiplicative part of the ex-
pected cost function, f(M,V) • j(V) , in, for example, Equation 9 has
dropped out. That is because the probability of detection is assumed to
be zero given that the government monitor has been suborned. Instead
of the original expected cost curve shown in Figures 19 and 20 there would
be an entirely new linear curve with a slope equal to [(BBj/dV) + (BB2/dV)]
Naturally the slope of this new curve would be equal to the slope of the per-
mittee's expected gain curve (which is unchanged) at a higher optimum
value for V because only then will collusion by his employees and the
government monitor have increased his maximum net expected gain.
If the bribes paid to employees and the government_monitor_are not a
function of the size of the violation but fixed amounts B-^ and B2 that are
independent of the size of the violation, a_wors_t^case occurs; the new ex-
Pected cost curve is a horizontal line at (Bi + B£) • Consequently, the
Permittee maximizes his net expected gain by violating the standard by
SR • In short, he operates as though no standard existed. Referring
back to Figure 9, the cost to society would equal A + M where M is
equal to the alleged "monitoring" expenditure, or an amount that exceeds
the loss to society which occurs if no standard and monitoring are imposed.
Apart from imposing on society the additional cost of M for monitoring,
corruption of the monitors merely imposes a transfer_of the permittee's
gain. The permittee would now retain only B - (B! + B2). with BI being
transferred to his employees and B2 to the government monitor.
59
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Implementation Problems of Monitoring
Some practical difficulties attend the implementation of the optimal
compliance monitoring strategy. While the optimal probability of detec-
tion to aim for is that level at which the marginal benefits from compli-
ance monitoring equal the marginal costs of compliance monitoring (see
Figure 28), it is inconceivable that this level (and implicitly optimal level
of expenditure on compliance monitoring) will remain unchanged over
time. It would only remain unchanged over time if all the underlying ele-
ments of the marginal benefit and cost curves remain unchanged. For
example, the marginal cost curve for compliance monitoring will change
as technological innovations in the monitoring industry occur and as the
relative prices of various alternative monitoring techniques change. Sir*1"
ilarly, the marginal benefit curve will change as the marginal social gam
from monitoring (i. e. , the loss avoided) changes. And this will change
as the polluter's marginal benefits function from emitting pollutants and
the pollutee's marginal damage function from the impact of pollutants
change (which changes the optimal level of pollution). These marginal
benefits from pollution emission and marginal damages caused by pollu-
tion are themselves dependent on the cost of the factors of production
and the prices of the products that the polluter and his victim are con-
fronted with. These factor costs and product prices will inevitably change
with the passage of time. This will change the optimal level of pollution,
the optimal probability of detection, and the optimal level of compliance
monitoring expenditure. It is apparent, then, that the determination of
the optimal level of pollution and, from that, the optimal probability of
detection is not a once and for all exercise. Quite the contrary, in prin-
ciple these change continuously through time and, consequently, any op-
timal strategy would require continuous applications of time and resource
to its discovery and implementation. Indeed, it is quite conceivable that
the transaction costs involved in continually determining and implement-
ing the optimal monitoring strategy would exceed the social gain from its
implementation (in terms of the net social loss avoided). If that is the
case, then it follows that it is not in society's interest to follow that strat-
egy. Moreover, the hypothetical case employed in this analysis to illus-
trate the economic principles involved in the determination of an optimal
monitoring strategy was chosen for its simplicity. The example involved
one identifiable polluter emitting one pollutant which damages one other
party. If the practical implementation of an optimal monitoring strategy
on a continuing basis is likely to prove so difficult in such a simple situa-
tion, one can only conjecture how much more complicated and costly the
implementation of such a strategy would prove to be in situations where
multiple polluters, multiple pollutants, and multiple pollutees exist, °r
for nonpoint sources of pollution. However, this does not necessarily
mean, purely on the grounds of economic efficiency, that nothing should
be done to preserve the quality of the Nation's groundwaters.
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THE PRAGMATIC ALTERNATIVE-SECOND-
BEST SOLUTIONS
Standard Setting
Since implementation of the optimal monitoring strategy on a continu-
ous basis through time may impose more costs than benefits on society
(in terms of social loss avoided), this section examines second-best
solutions as a pragmatic alternative to this dilemma. (The term "second-
best" is used in the theory of welfare economics in reference to non-
pa reto-optimal situations (i. e. , when one transactor can be made better
off without any other transactor being made worse off). The term as used
here is only loosely related to the rigorous way in which it is used in for-
mal theories of second-best choices. ) Essentially, second-best solutions
capitalize on the fact that rational action can be predicated on limited in-
formation concerning the polluter's total benefit function from emitting
pollutants and the pollutee's total damage function from the impact of pol-
lutants.
The limited information that is required in order to implement some
form of second-best solutions is illustrated in Figure 29. The two dashed
' TOTAL BENEFITS AND
DAMAGES, $
X
r
o'f
x
T
W'
COMPANY'S
TOTAL BENEFITS
FUNCTION
\/
A
/FARMER'S TOTAL
/ DAMAGES FUNCTION
,!/
~~ \
Cl CONCENTRATION (mg/l)
T W R
Figure 29. Second-best alternatives.
61
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curves in this figure are the farmer's total damages function and the oil
company's total benefits function first presented in Figures 5 and 7,
respectively.
These two curves are shown dashed in Figure 29 as a reminder that
their precise, or complete, configuration is assumed not to be known.
Information on these damages and benefits is restricted as follows:
1. The damages sustained by the farmer when the oil com-
pany's activities are unconstrained. These are the dam-
ages associated with the level of chloride concentration
at the farmer's well equal to OR ; namely, RR' . The
total benefits to the oil company are equal to RX (a
maximum).
2. The chloride concentration at the farmer's well at which
the damages sustained by the farmer would be zero.
This is the threshold-level of chloride concentration
in Figure 29. (The threshold may, of course, be zero
chlorides. In general, however, it will be some posi-
tive level. )
3. The cost to the oil company of reducing the chloride
concentration at the farmer's well to the threshold level
OT . This is the reduction in the present value of the
oil company that is implied when it adopts the least-
cost way of reducing the chloride concentration at the
farmer's well to OT (an amount XT' in Figure 29).
In principle, XT7 may be infinite if no economically
feasible techniques exist for lowering the chloride con-
centration level to OT . In general, however, it will
not be.
4. The damages sustained by the farmer, and the cost to
the oil company, associated with the reduction of the
chloride concentration level at the farmer's well to
that attainable when the "best practicable control tech-
nology [BPT] currently available, " is adopted (USEPA,
1974). These damages and costs are WW and XW",
respectively, while the chloride concentration level
associated with BPT is OW. (The chloride concentration
level associated with BPT may be less than the thresh-
old level, i. e. , OW may be less than OT. When the
threshold is less than BPT, XT7 —i. e. , the reduction in ,
the present value of the oil company implied when it adopts
62
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the least-cost way of reducing the chloride concentra-
tion at the farmer's well to the threshold—would be
expected to be very large. In other words, the total
benefits function falls off precipitously to the left of
W" because of the extremely high cost of lowering
pollution levels below BPT. In principle, the O'w"
part of the total benefits curve could become a negative
value.)
If complete information were available on the total damage and bene-
fits curves, the optimal level of pollution to adopt would be that level at
which the divergence between the two curves was a maximum. This
would correspond to the level OS (not shown, but between OW and OR ).
However, assuming that this complete information is costly to acquire
compared to the cost of acquiring the smaller amount of information dis-
cussed in items 1 through 4, above, the question is not whether to im-
plement OS (the optimal, or "first-best, " policy when information is
complete) but which of the second-best policies 0 , OT , OW , or OR
to implement given the limited information that is available or may be
acquired relatively inexpensively.
The principle governing the decision is the same; namely, select that
second-best alternative with the largest net benefit to society. Diagram-
rnatically, this amounts to selecting the second-best policy from the sub-
set, 0 , OT , OW , and OR at which the difference between the oil com-
pany's benefits and the damages to the farmer is the largest. For pur-
poses of illustration, in Figure 29 this is seen to be the BPT policy, OW ,
since W'W" exceeds 00', TT7 , and XR7 . Of course, the 0, OT , and
OW policies also involve monitoring and other enforcement costs which
the OR policy does not. Thus, OW is, in fact, the desired second-best
policy only if W'W" exceeds XR' by at least as much as the monitoring
and enforcement costs required to implement that policy.
Pragmatically, in setting standards the EPA is confronted with the de-
cision whether to allow the oil company's activities to continue at the un-
constrained level (OR) or whether to set some new standard such as BPT,
threshold, or zero pollution. To decide which is the appropriate second-
best standard, the EPA would have to estimate the reduction in damages
to the farmer for each policy and subtract from this the additional cost
to the oil company plus the monitoring and other enforcement costs for
each policy. The policy for which this difference was largest is the ap-
propriate second-best policy (as long as the difference is positive). By
way of illustration, in Figure 29 the OW policy reduces the damages to
the farmer by R'W' while increasing the oil company's costs by XW" .
The net benefit to society from changing to this standard is, therefore,
63
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(R'W') - (XW" 4- Mw) where MW is the monitoring and other enforcement
costs associated with the BPT standard. The net benefit to society from
changing from OR to OT would be (R;T) - (XT' + Mt) where Mt is the moni-
toring and other enforcement costs associated with the threshold stand-
ard; and the net benefit to society from changing from OR to 0 would be
(RX0) - (XO' + MQ) where MQ is the monitoring and other enforcement
costs associated with the zero pollution standard. In principle, MW,
and MQ may differ.
Monitoring
The previous subsection argues that, in a second-best situation, the
appropriate policy is to select that standard for which the difference be-
tween the reduced damages to the farmer and the additional cost to the
oil company plus the monitoring and other enforcement costs was the
largest. However, this says nothing about what the optimal expenditure
on monitoring should be. The reason for this omission is that, in a
second-best situation, there is not sufficient information to infer the op-
timal expenditure on compliance monitoring. This can be explained by
referring back to Figure 28 and, in particular, to the marginal benefit
curve for compliance monitoring. That curve in turn was derived from
Figure 26 which shows the total social gain from monitoring (in terms ot
loss avoided) as a function of the probability of detection. But the gain
was defined in terms of the area between the marginal benefits and datn-
• *? *% \
ages functions associated with various levels of pollution (see Figure L^i1
However, these latter two curves depend on complete information con-
cerning the total benefit and damage curves associated with pollution
and, by definition, in second-best situations such complete information
is not available. By this chain of reasoning, in second-best situations
the marginal benefits curve from compliance monitoring is not discern-
ible, and thus the optimal probability of detection to aim for (which also
is implicitly optimal for compliance monitoring) cannot be identified.
There seems to be no answer to this particular difficulty except to
make certain that if a second-best standard is set, the monitoring and
other transactions costs imposed to enforce compliance with the stand-
ard are no greater than the difference between the reduction in damages
to the farmer and the increase in costs to the oil company. As long as
the expenditure is kept below that difference society gains; if it equals
that difference society is no better or worse off and the second-best pol-
icy would only have distributional effects; if it exceeds that difference
society loses.
The foregoing discussion of implementation problems and second-best
solutions serves to show how difficult it proves to be for the government
64
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to set and enforce economically efficient groundwater quality standards
by direct regulation. Because of these difficulties, Section V explores
an alternative method of obtaining an economically efficient level of
groundwater quality which relies on a respecification of the private prop-
erty right to that resource.
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SECTION V
WASTE RELOCATION RIGHTS: AN ALTERNATIVE SYSTEM
OF GROUNDWATER MONITORING AND POLLUTION CONTROL
In general, it is analytically incorrect to argue that pollution should be
eliminated. As with most other things, there is an optimal amount of
pollution. The burden placed upon regulatory authorities is to design in-
stitutional arrangements that will achieve that optimum. The analysis in
Section IV of the set of institutional arrangements required to achieve
this end through direct government regulation by issuance of permits
shows that considerable, perhaps insuperable, difficulties lie in the way
of this option.
This section discusses in some detail a second scheme for regulating
groundwater quality which revolves around what is described as a "Waste
Relocation Right. " The associated monitoring requirements for this reg-
ulatory scheme are also addressed.
It is recognized that the concept of waste relocation rights is contro-
versial and would require considerable modification of existing institu-
tional and legal mandates in order to be implemented. As a consequence
it must be stressed that a regulatory scheme based on waste relocation
rights does not necessarily reflect EPA policy.
ADMINISTRATIVE VERSUS NONADMINISTRATIVE
POLLUTION MONITORING AND CONTROL
Most attempts to monitor and control groundwater pollution in the
United States have involved administrative regulations. Discharge per-
mits, for example, set allowable upper limits on the amount of pollutants
that may be disposed of into the ground at a point source. This limit is
set by statute or regulation by the cognizant administrative agency. Most
of the proposals for new methods to monitor or control pollution, includ-
ing effluent disposal charges, also involve mainly administrative tech-
niques. Although a pollution regulatory system based on effluent "fees"
is thought by some to be a market-oriented type of pollution control, it
too is more an administrative than a market system. Although the pollu-
ter is allowed to vary his disposal techniques according to his comparison
of the cost of the fees paid for injection and the cost of alternative means
for waste disposal, the fee is determined administratively; it is not a
66
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price that fluctuates according to the market processes of demand and
supply. Moreover, most monitoring under the administrative regulatory
system is performed by public agencies. Under a nonadministrative sys-
tem, monitoring would be undertaken more often by private parties through
the ordinary market processes of transactions among strangers.
The U. S. system of basically administrative control of monitoring and
pollution is too new to yield much knowledge of its overall impact on so-
ciety. Among the benefits of administrative regulation have been moni-
toring of severe pollution situations, preventing deterioration of some
important aquifers by pollution, and drastically limiting disposal of such
dangerous pollutants as chromates. In spite of these benefits, however,
it is difficult to judge whether such regulation has on net improved soci-
ety's welfare. Administrative regulations are imperfect instruments for
controlling and monitoring pollution. The responsible agencies may not
possess all the information required to ascertain existing or optimal pol-
lution levels. They may devote too many or too few resources to moni-
toring. Once rules and regulations on monitoring and pollution control
are implemented, they are often costly and cumbersome to change even
if circumstances alter rapidly. The requisite monitoring and compliance
data to assure that no more than the economically optimal amount of pol-
lution occurs might become available eventually. But agencies might lack
incentives to employ these data and to pursue social optimality single-
mindedly to the exclusion of internal bureaucratic goals. Moreover, an
agency devoting itself too zealously to the reduction of pollution might cur-
tail certain pollution-causing economic activities that would be of greater
benefit to society than the value of removing the pollution associated with
them. Unfortunately, there is little evidence to suggest that administra-
tive regulation of monitoring and pollution has resolved these problems
in a fashion that would, overall, benefit society. Thus, given today's
meager knowledge, it is literally the case that past experience with ad-
ministrative regulation of groundwater pollution and monitoring raises
more questions than it answers.
A recognition that the existing system of pollution and monitoring con-
trol is imperfect evidently has not troubled many officials or citizens,
probably because the existing system of regulation, with all its warts, is
considered to be superior to "no regulation, " the only alternative that has
been conceptualized in the public's mind. But the criticism against the
existing administrative system could be taken seriously if there were a
feasible nonadministrative system of regulation that could prevent uneco-
nomic aquifer degradation while containing fewer of the pitfalls of admin-
istrative regulation.
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One nonadministrative system of groundwater pollution monitoring and
control that could be considered as a legitimate alternative to improve
the overall efficiency with which the Nation's aquifers are used has as
its basic element a waste relocation right.* The term "waste relocation
right" is used here in recognition that wastes, or residuals, are the in-
evitable result of man's activities and that, equally inevitably, they must
be relocated somewhere. The problem is, of course, to get them opti-
mally relocated. The waste relocation right is a grant to each land owner
which entitles him to protection from pollution above a specified amount
in the groundwater underlying his land. This right would be exchanged
among persons through ordinary market processes and would be enforced
by the existing U. S. J.egal system. It would not require the creation of
new, untried, and potentially expensive governmental agencies. This
would be an essentially private system of pollution monitoring and control,
with limited government supervision, based on the self-regulating forces
of existing and tested market processes and legal institutions.
Waste relocation rights would be analogous to mineral leases and tied
to the ownership of land. Pollution of groundwater underlying another
party's land would be prohibited without first purchasing that party's
waste relocation right. Such rights would be valuable, freely transfer-
able, and command prices in the marketplace. They would be exchanged
privately in much the same fashion as titles to land are now bought and
sold. Monitoring for pollution in excess of the allowable levels would
mainly be through private contracting. Enforcement of property owners
rights would be through injunctions or monetary damages awarded by
courts. Thus, the waste relocation rights scheme would rely upon and
harmonize with the basic processes by which rights to other resources
in this country are exchanged and protected.
The remainder of this section describes the waste relocation rights
system and its ability to cope with the peculiar and sometimes severe
problems presented by groundwater pollution. Detailed are the nature
of the rights, the advantages of court enforcement by a rule of strict lia-
bility, problems in setting the initial limits on the amount of waste that
may be relocated, the processes and costs of exchanging rights, the pro-
tection given by the system to nonowners of land and environmental groups,
and some potential problems in the operation of this property system in-
cluding situations where it might not be applicable.
*For discussion of a surface water waste relocation right scheme, see
Dales (1968), Chapter 6. Dales calls his contract a "pollution right. "
However, the term "pollution right" has been countersloganized in
the phrase "there can be no right to pollute" which, though wrong, has
emotional appeal to those who traffic in slogans rather than analysis.
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WASTE RELOCATION RIGHTS*
Assume that there are 11 pollutants in the range of 1,. . . , n_ and that
there are m_holders of waste relocation rights in the range of 1,... ,m.
Py would then designate the maximum allowable level of the i^^1 pollu-
tant underlying the land of the j^1 individual. For example, if the 4th
pollutant were chlorides, P^J would represent the maximum concentra-
tion of chloride pollution (e, g. , 300 milligrams per liter of water) that
rightsholder j would legally be required to sustain under his land. P£J
could be the maximum allowable biochemical oxygen demand for organic
material for water under j's land; Py* could refer to the maximum parts
per million for dissolved Folids in the water under j^s land; and so forth.
Under a waste relocation rights scheme, the owner of each legally
defined parcel of land or his assignee in any of the United States would
be granted by either Federal or State statute a package of rights and
duties regarding the use and enjoyment of the waters underlying his land.
This package would contain paragraphs to the effect that:
1. He is granted the exclusive right to engage in economic
or other activities on his land which originally degrade,
change, or pollute the water underlying that land to any
extent, provided that the level of pollution which origi-
nates from his land does not exceed PJJ in the ground-
water at any point beyond the boundaries of his land.
2. He is granted the right to be free of pollutants in the
water underlying the boundaries of his land, which
may originate from activities on the land of any other
owner or his assignee in the United States, and which
degrade, change, or pollute the quality of the ground-
water underlying the boundaries of his land beyond the
levels PJJ referred to in item 1.
3. For violation of the duty defined in item 2, an owner
of land or of waste relocation rights shall, upon proof
by any other owner of a violation, be required to adopt
the least-cost method of restoring the quality of ground-
water to the level Py specified in item 1 within a
*The basic analysis contained in pages 69 to 81 of this report is analo-
gous to and drawn from the property system for electromagnetic radia-
tion found in De Vany et al. (1969). The important contributions of Pro-
fessor Charles J. Meyers to the conception and the legal drafting of
these property definitions are gratefully acknowledged.
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period of M_months, where M_is determined according
to accepted practice for models of groundwater flows
for particular aquifers, given the maximum levels of
pollution P^. In addition to the foregoing relief by
injunction, the complainant may recover such pecu-
niary damages that he may be able to prove in a court
of law as having been caused by said violation.
4. All owners of land or waste relocation rights must reg-
ister their rights to groundwater use, including any
subsequent exchange or recombination of those rights,
in a central registry maintained by the cognizant gov-
ernmental agency for public access by any owner of
land.
5. A party suspecting a violation of his waste relocation
rights may install monitoring devices on his own
property, and he may install at his expense such de-
vices on the property of other owners with their ex-
press consent.
6. There shall be no restraint upon the transfer or ex-
change between two or more owners of land of all or
any part of the waste relocation rights which are spe-
cified in items 1 and 2, either as to:
a. Changes in the boundaries of land beyond which
pollution in the underlying groundwater may
not exceed the limit P;;, or
J
b. Changes in the intensity of the pollution of
groundwater to a quality different from the
PJJ defined in item 2 within the boundaries
of the owners of land or waste relocation
rights who are parties to the exchange
provided, that this exchange does not result in levels
of pollution in excess of the original Pj- specified in
item 1 for the groundwater underlying the land of any
owner of waste relocation rights who has not been com-
pensated for this higher pollution or whose permission
has not been obtained.
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COURT ENFORCEMENT AND STRICT LIABILITY
The waste relocation rights regulatory system would be created by
statute but enforced by adversary proceedings in courts of law. This en-
forcement procedure appears to have several advantages. First, there
is already a long-standing body of case law on groundwater pollution, so
the courts are familiar with the often technologically complex questions
raised by groundwater pollution and monitoring problems. (See, for
example, Corker (1971), Knodell (1967), and Meyers and Tarlock (1971).)
The courts could probably enforce groundwater rights more successfully
than would relatively untried administrative agencies. Second, the ten-
dency of the courts to settle fresh cases on the basis of precedent would
give owners of waste relocation rights some confidence over the nature,
extent, and value of their resources. Third, the adversary nature of
court proceedings would focus on the competing harms involved in pollu-
tion cases—i. e., whether the polluter is to impose the cost of lower water
quality on the pollutee or the pollutee is allowed to shut down some or all
of the polluter's economic activities. Coase (I960) has argued that courts
often take these economic factors into account in reaching decisions. If
the process by which courts weigh competing harms usually leads to se-
lecting in favor of the least economic cost, then efficient resource use
would be promoted.
In general, there are two broad alternative rules of liability for pollu-
tion that the courts might impose: fault (or tort) versus strict liability.
Under tort law, liability usually depends not just on the actual violation
but upon such factors as the reasonableness of the violation or whether
the defendent intended to harm the plaintiff. (See Section II. ) Alterna-
tively, under the rule of strict liability, a dependent's guilt is determined
by only the fact of his violation of a duty owed to someone else, and not
by the degree of the violation, his state of mind, or other extenuating
circumstances.
According to the waste relocation right, liability for violations would
be strict (De Vany et al., 1969). Referring to item 3 of the right, if
rightsholder A monitors for pollutant 4 under his land and finds more
than the allowed P4A which is traceable to rightsholder B, then^AJs
remedy is to sue B for the violation of duty which B owed to A. A may
sue B either for an injunction forcing B to reduce the pollution to an
amount within the P4A constraint before I£months have elapsed; for
damages which A_can prove he sustained as a result of pollution from B
in excess of P4A; or for both an injunction and monetary damages. All
that matters in court is whether B's actions led to more than P4A pollu-
tion being found in the water underlying either A's land or the boundaries
of his waste relocation right. It does not matter whether B's violation in
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exceeding P^ was the result of intent, carelessness, ignorance, malev-
olence, or stupidity. It also does not matter whether B may have exceede
the P4A limit by a small or "reasonable" amount for a short period of
time. If B exceeds P4A by any amount no matter what the reason may be,
he is guilty under a standard liability if A chooses to enforce his right.
A standard of strict liability is rarely found in the existing law of
groundwater pollution. (See Section II, particularly quotations from
Corker (1971).) The guilt of the polluter is usually determined by one
of several tort law concepts that seek to determine the nature of fault
for pollution. The determination of fault raises additional questions be-
yond the simple and sole question raised by strict liability—whether B s
pollution under A's land exceeded P4A- ^n some situations, tort law de-
termines guilt according to -whether the polluter intended to harm the po
lutee, or whether the polluter had been careless or negligent in failing to
exercise a prudent degree of care in his pollution-causing activities. In
still other cases guilt depends upon whether the pollution caused a nuisanc
to the pollutee.
An economic objection to enforcement by a rule of tort liability is tna
transactions costs would be raised and the incentives for efficient use or
resources would be weakened because the process of making and enforc-
ing transactions consumes additional resources. It includes the costs
for both buyers and sellers of searching out, negotiating, and enforcing
mutually beneficial exchange opportunities. This involves hiring survey-
ors, lawyers, and other consultants. Sometimes it is necessary to go
to court when voluntary compliance is not obtained or when the parties
are in disagreement over whose right is dominant. When these costs ar
relatively high, the incentives for rightsholders to enter into exchanges
will be limited: if the cost of making an exchange exceeds its value to
either party it will not be completed. Relatively high transactions costs
will dampen and limit the efficiency of the economic process by which
rights to resources move from lower valued to higher valued uses and
users. Thus, in designing new property rights, care should be taken to
minimize transactions costs in order to encourage beneficial exchange.
One factor that will almost always impede exchange is a vague defini-
tion of rights or liabilities. The more uncertain rights and duties are,
the greater the transaction and litigation costs will be. In the cases of
tort law, a legal determination of the meaning of such ambiguous stand-
ards as "reasonableness, " "negligence, " "good faith, " or "intent, " wouW
be so lengthy and expensive that these concepts could scarcely be terrne
standards at all. If they could be given legal meaning, it would only be
by a lengthy ad hoc procedure where each situation is adjudicated accor
ing to its particular facts, individuals, personalities, intentions, etc.
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(De Vany et al., 1969). Since there really is no "standard" of tort lia-
bility, each case would require a separate adjudication and its result
would be in doubt until the verdict was in (Corker, 1971). This would
increase an owner's uncertainty about the value of his rights, tempting
him to try litigation before he bargains with his "adversary. " This ac-
tion avoids his purchasing a right that a court might later decide he al-
ready owned, or adjusting his economic activities to reduce pollution
when not required by law. Thus, nebulously defined rights reduce the
likelihood of bargaining, increase transactions and litigation costs, and
reduce the probability that society's scarce resources will be used opti-
mally. ^
^ ^Whether legal critics have found an acceptable substitute to tort lia-
bility, as Corker alleges they have not, is open to dispute. In the case
of waste relocation rights, a standard of strict liability would lower trans-
actions costs by raising "one, and only one, triable issue of fact: What
was the [level of pollution] at the time in question? " (De Vany et al.,
1969). Did it exceed the maximum Py level? This would not always be
an easy question to answer. Substantial resources would often have to
be devoted to the problem of monitoring and proving groundwater pollu-
tion. But it is probably an easier question to answer than the questions
raised by tort liability rules.
THE ZERO WASTE RELOCATION "RIGHT"
The preceding comparison of fault versus strict liability rules also
suggests that a regulatory system of waste relocation rights which sets
the initial Pjj equal to zero would not promote the efficient use of re-
sources (De Vany et al. , 1969). Although some might find it appealing
to specify waste relocation rights that allow zero increments to ground-
water pollution, these "rights" would have little value. As a practical
matter, pollution increments cannot literally be reduced to zero without
curtailing most human and economic activities. The practical result of
setting an initial limit of 0 mg/1 of, say, chlorides would be to give pol-
luters the right to inject chlorides up to the point where they did not cause
excessive harm to the groundwater underlying the land of their neighbors.
But, as has just been argued, a right defined in terms of excessive harm
entails an enforcement mechanism having relatively high transactions
costs. Each case of violation under the zero pollution right, as with the
fault rule of liability, would have to be adjudicated separately in order
to determine what constituted excessive harm in various circumstances.
This increased degree of uncertainty would lead parties to litigate rather
than bargain and would curtail exchanges, all of which would diminish the
efficiency of resource use. Thus, on grounds of economic efficiency, the
waste relocation right should be defined at some positive level rather than
at zero.
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SETTING THE INITIAL WASTE LEVELS
Each landowner has thus far been hypothetically granted a package of
rights and duties: first, a right of protection from a certain level of pol-
lution caused by others in the groundwater underlying his land; and sec-
ond, an obligation to refrain from causing this same level of pollution to
be exceeded in groundwater underlying all other parcels of land. Thus,
all landowners have a structure of symmetrical rights and duties concern-
ing groundwater pollution. The permissible amount of pollution is deter-
mined by the original limits of the P^ and by the subsequent process of
exchanging these rights in the marketplace.
The initial Pjj limits would be set after a series of once-and-for-all
hydrologic, biologic, chemical, and economic studies established toler-
able and economically usable amounts of PJJ. These would result in
packages of rights that would have monetary value. Two of the Py fea-
tures should be stressed. First, the initial levels should usually be
slightly in excess of ambient levels of pollution. PJJ greatly in excess of
ambient levels would permit rightsholders to substantially increase pol-
lution without obtaining consent from the affected parties. PJJ signifi-
cantly below ambient pollution levels should also be avoided. This woul
force some landowners to "clean up" the waters underlying their property
before the land could be used for any purpose, possibly imposing signifi-
cant losses on them.
Second, the initial PJJ must be usable but need not be perfect. That
is, they need not be economically optimal or ideally suited to the use tha
would result on a given parcel and all surrounding parcels of land with
existing technological and market conditions. The cost of amassing the
information required to determine optimality at the outset would be enor-
mous. Such information is not presently available and would probably
cost more than the several rounds of exchanges required to optimize the
original rights packages. Moreover, the variables determining the opti-
mality of rights packages— such as population concentrations, technolo-
gies, costs, and market demands—will undergo constant change. This
requires that rights be restructured accordingly. Therefore, under the
waste relocation rights regulatory system, the economically optimal
amount of pollution and monitoring would be approached iteratively throug
market exchanges once usable packages of rights were created and as-
signed. The market exchange approach avoids the most serious difficul-
ties associated with the administrative maintenance of the optimal level
of groundwater quality via permits, the problem of the changing nature
of that optimum through time (De Vany et al. , 1969).
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In most cases, the process of exchange would constitute the least ex-
pensive process for allocating waste relocation rights from lower to
higher valued uses. To illustrate this, if brine pollution from the oil
company example of this study were seriously affecting the crop yields
of adjacent farmers, the farmers would have incentives to purchase the
oil company's waste relocation right if the right were more valuable in
agriculture than in industrial production. However, if it is known in ad-
vance that a particular level of pollution would be devastating to highly
valuable activities located nearby—such as a municipal water supply—
then exchange may not be the most efficient process for determining the
optimal amount of pollution. In these cases it would be uneconomic to
set the initial P^ at a level that would devastate the higher valued use,
and setting it at a lower, near zero level could avoid the cost of restruc-
turing rights later on.
EXCHANGING WASTE RELOCATION RIGHTS
Two conditions must be met in order for optimality to be approached
through market processes. First, the cost of making exchanges and re-
combining packages of waste relocation rights must be low relative to
their value. Second, mutually beneficial exchanges between two or more
transactors must not impose uncompensated costs in excess of Py pollu-
tants on other rightsholders unless their consent is first obtained. Just
as it is socially and economically undesirable for two transactors to im-
pose harm on third parties without their consent, it is equally undesirable
for the law to require that the consent of third parties be obtained before
each exchange is concluded. The transactions costs required to achieve
optimal resource use would be almost the same in each instance; in the
first instance third parties must bargain with transactors to prevent the
harm, and in the second instance transactors must "buy off" all third
parties (De Vany et al. , 1969). The definition of waste relocation rights
avoids both extremes by allowing third parties to be subjected to pollu-
tion levels up to the P^ threshold. As long as the PJJ limit is not ex-
ceeded, exchanges between two parties are not severely constrained and
the extraordinarily high transactions costs and enforcement costs which
usually accompany exchanges involving a large number of transactors
can be avoided. When the effect of the exchange is to exceed PJJ, how-
ever, third parties must be brought in and compensated.
Waste relocation rights are, by the terms of the property definition,
^e jure covenants expressly tied to the ownership of land. Therefore,
exchanges of waste relocation rights would be similar to exchanges of
land with the exception that the transactors would be exchanging rights
to alter (either improve or pollute) the quality of waters beneath the land
without necessarily purchasing the land itself.
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A landowner's sale of waste relocation rights to a party who seeks to
alter the quality of groundwater is exactly analogous to a mineral right.
For example, an oil company may buy or lease subterranean rights to
drill or explore without buying the parcel of land itself. All the driller
purchases is the owner's promise with respect to one use of the land.
Exchanges of this sort occur commonly in spite of the large number of
landowners with which an oil company may have to deal, especially in
cases of slant drilling.
Land transactions may serve as a model for exchanges of waste relo-
cation rights. Two primary types of exchanges will occur: restructuring
all or portions of waste relocation rights without exchange of the land it-
self; and combining or subdividing rights as the result of the sale of land.
RESTRUCTURING WASTE RELOCATION RIGHTS*
Consider the simple situation of four landowners depicted in Figure
30 where the initial level of groundwater chloride content for each is set
at 300 mg/1. Assume that landowners A, B, and C are farmers but
that D begins to drill for oil and seeks to dispose of his brines via an
unlined disposal pit. Knowing that the flow gradient in an underlying
aquifer is from east to west and that all pollutants are traceable at low
costs, D purchases B's rights (but not B's land) to create up to 300
mg/1 of chloride pollution at any point beyond B's land. When B's rights
are combined with D's initial right to achieve up to 300 mg/1 of chlorides
at any point beyond the boundaries of D's land, one might conclude that
D has now obtained the right to create up to 600 mg/1 of chlorides in the
groundwater in the vicinity of the B/D boundary, but this is not necessarily
D
Figure 30. Land parcel diagram, chloride pollution
example (Pc| = 300 mg/1).
*The analysis of exchanges of waste relocations rights in this and the
following subsection is based on the model of exchanges of radiation
rights developed in De Vany et al. (1969).
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so. Purchasing B's right to create 300 tng/1 of chlorides beyond B's
land automatically assigns to D the initial duty of B not to achieve more
than 300 mg/1 of chlorides in the waters underlying anyone else's land.
Unless he deals with A, D has not obtained the right to impose more
than 300 mg/1 of chlorides west of the A/B boundary. A's protection is
maintained in spite of the exchange between D and B. Thus, in order
for D to maintain his duty toward A, he may have to limit his brine con-
centration to substantially less than 600 mg/1 of chlorides in the vicinity
of the B/D boundary.
Similarly, the exchange between B and D does not relieve D from
maintaining the initial protection of the water underlying C's land from
either D's or J3's land. D's brine disposal activities after the purchase
of B's rights must take cognizance of his duty toward _C as well as B's
toward C, J3's toward A, and his own toward A. If any of these duties
are violated even slightly, D could face a lawsuit. Again, an analogy to
land law is apt. If D purchases from B the right to build a fence a few
feet to the west of the B/D boundary for its full length, this sale does not
change in any way the position of the A/B. B/C. or C/D boundaries.
Several conclusions follow from even this simple example of exchang-
ing rights apart from the sale of land. First, in order to make room for
his brine plume by purchasing B's waste relocation rights, D will want
to learn the direction of flow in addition to other characteristics of the
aquifer and perhaps to model them. Second, D will monitor groundwater
before and after the exchange occurs in order to make certain that he is
not exceeding his own or B's duties toward other owners of land. Third,
the transaction between B and D does not require the consent of A or C
unless their initial rights of protection against more than 300 mg/1 of
chlorides from either B or D are violated by the transaction. Transactors
are allowed some latitude before having to deal with third parties such as
A and C, but the extent of that latitude is determined by the initial P^-.
At least to this extent some transactions including many participants,
with their high transactions costs, are avoided.
The preceding analysis also applies to two other subcategories of ex-
changes which amount to combining portions of waste relocation rights.
In the first subcategory, B might agree to sell D the rights applying to
the easternmost one-fourth of B's land. This would permit D to achieve
a maximum of 300 mg/1 of chlorides at a new waste relocation rights
boundary (represented by the dashed line of Figure 30} lying one-quarter
of the distance westward from the B/D land boundary. As with exchanges
involving sales of entire waste relocation rights, sales of portions of
waste relocation rights would not allow B or D to violate their original
duties toward A and C. Indeed, the contract between B and D would
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provide for D's right to monitor on B's land up to the dashed-line boundary
so that D could make sure that he adhered to his obligation toward B not
to exceed allowable levels of pollution. B would continue to monitor on
his side of the boundary, and both A and C would continue monitoring along
the edges of their lands to make sure their rights also were not violated
by the exchange. D's entire monitoring and modeling effort would indi-
cate by how much he could increase pollution in the waters to the west and
south of the dashed-line boundary. This would influence the price that D
would be willing to pay B for this portion of B's waste relocation rights.
The second subcategory of exchanges between B and D would be retain
the initial solid-line B/D boundary but to increase the allowable amount
of chloride pollution which D could release into the waters underlying B s
land to, say, 400 mg/1. However, this would not relieve B and D of their
respective duties to achieve no more than 300 mg/1 of chlorides in the
waters under A's or jC's land unless the permission of A or C were ob-
tained. Again, some modeling and monitoring would be undertaken by
both B and D before entering into this contract in order to protect them-
selves from liability toward A or C.
SALES OF LAND WITH WASTE RELOCATION RIGHTS
The waste relocation rights regulatory system allows rights to be ex-
changed separately from the sale of land. But assume now that the land
is sold in its entirety with the original waste relocation rights intact.
Assume also that, owing to the long-lived and slow-moving nature of
groundwater pollution, a violation is not discovered until substantial time
has passed after the pollution-causing activity occurred. If A sells his
entire land to Z and C finds a violation of more than 300 mg/1 of chlorides
some time after this transaction, two questions arise. First, if liability
is assigned, whether it should go to A or to Z, and whether C would sue
A or Z or both. Second, whether liability should be assigned at all and
•whether C may sue anyone.
The critical issue for the first question is that the liability should be
assigned fully to just one of the two parties (De Vany et al. , 1969). Divi-
sion of liability between the two is bound to be arbitrary in some degree
and would promote controversy. This raises transactions and litigation
costs. A more efficient solution would be to assign full liability to just
one party according to either of two legal rules. The first rule, "last
in time is first in right, " would place the full liability on A which he
could either retain or shift to Z at a cost to himself. The second rule,
"first in time is first in right, " would place the full liability on Z which
he would take into account as he monitored for existing pollution levels
and decided on his offer price to A. As before, Z could contract the
burden of liability back to A (at a price) or keep it.
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Each of these legal rules has similar implications for groundwater
monitoring. Assume that A originally sold his land with waste reloca-
tion rights to E who eventually sold out to Z. Assume also that the Pj-
had not changed between sales. Under the "last in time is first in right"
rule, A would retain liability until A either died or was dissolved (de-
pending upon whether A is a person or a firm). Liability would then pass
to E even though Z currently owned title to the land and waste relocation
rights. Since C has incurred a violation of his waste relocation rights
he would have recourse against either A or JE, who would regularly moni-
tor the groundwater under what was once A's land to make sure that C's
protection was maintained (or to determine for himself the extent of the
liability to C). Under the "first in time is first in right" rule, Z would
be liable for the violation of C's waste relocation rights. In this case,
Z would monitor before purchasing the land from E to determine his
potential liability to C and other rightsholders and adjust his offer price
accordingly.
Thus, monitoring would be undertaken under either legal rule. Under
the "first in time" rule, it would be done at Z's expense. Under the
"last in time" rule, it would be performed at A's or E's expense. More-
over, there does not appear to be any difference between the quantity of
monitoring undertaken under the two rules as long as the level of PJJ
protection afforded to C and others remains unchanged.
The answer to the second question—whether C may sue anyone —in-
volves considerations of equity more than economics. If C were given
no protection at law from pollution by others, the pollution might still
be reduced or removed if this were worth more to C than the payment
necessary to get Z to eliminate the pollution source or to take other cor-
rective action. If transactions costs were low, the optimal allocation of
resources would be achieved regardless of whether C were given express
protection. * Further, monitoring would probably be unaffected by a fail-
ure to give C legal protection. Rather than A or Z monitoring to avoid
violating C's rights, C would incur monitoring costs to discover the ex-
tent of the pollution harm and the party with whom he could bargain to re-
duce or remove it.
However, if it is desirable on grounds of equity to give protection to
C, there is reason to choose the "first in time" liability rule. This is
Because of the longevity of groundwater pollution. Since C may incur
pollution damage long after causative action by A or his assignees, as-
signing liability to Z on the basis of the most recent ownership assures
*See Coase (I960) and Section HI, page 24, "Achieving the Efficient
Solution. "
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that _C will always have legal recourse for damages. To free Z of lia-
bility against C could mean that C would have no recourse if A and other
intervening owners of that land prior to its acquisition by Z were either
deceased or difficult to locate. Also, assigning liability to the most re-
cent owner avoids the cost of detailed title searches to discover which
previous owner bears liability. Since the "first in time" rule has no off-
setting increase in monitoring costs, it appears to be preferable on eco-
nomic grounds.
Different possibilities arise if A sells only the southern half of his
land to Z. C might incur pollution from both A and Z. A and Z might
divide A's original waste relocation rights and duties in a fashion to as-
sure that C's protection right was not violated. But if the exchange oc-
curred and C's protection right were violated, then according to the
"first in time" rule, C would sue Z first. If modifying or shutting down
Z's pollution-causing activities were insufficient to achieve C's original
level of pollution protection, then C could sue A too. As before, it
would be undesirable to allow C initially to sue both A and Z together,
and thus reduce the total pollution in the waters beneath C's land by ap-
portioning the reduction between A and Z by some method (such as by
the fraction that the size of A's and Z's land bears to the total area).
While various methods of apportionment are possible, they would un-
doubtedly raise transactions and litigation costs.
Now assume that A sold only the southern half of his land in four por-
tions to Zj_, Z2, Z3, and Z4. Any subsequent violation of C's right to
protection against more than 300 mg/1 of chlorides would give C the
right to sue any one of the four, or all of them together, as having vio-
lated A's original duty of not raising the chloride content above 300 mg/1
in the waters underlying C's land, which duty both A and the_Zs assumed
after the exchange. If a suit against one or more of the Zs were insuf-
ficient to reduce the pollution under C's land to under 300 mg/1 or less
of chlorides, C would ultimately have recourse against A as well under
the "first in time" rule. However many Zs there may eventually be,
C would have the right to join one, two, or all of them in a lawsuit to
protect his rights. If necessary, C could additionally sue A or whoever
might have subsequently purchased the northern half of A's land, but this
could only be done according to the priority sequence established by the
"first in time" rule.
By the same token, if C subdivided his land and one or all of the Cs
experienced a pollution violation, the Cs would have the same legal right
against chloride pollution in excess of 300 mg/1 as C himself initially
had against A, Z, or any of the Zs. It is conceivable in this case that
all the Cs would join together and sue all the Zs ( if necessary including
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A) in a single action rather than each of the Cs suing each of the Zs sep-
arately. This outcome is likely since transaction costs would probably
be lowered (De Vany et al. , 1969).
If numerous exchanges and subdivisions of land occur with the passage
of time, the procedures for enforcement will grow increasingly complex.
But this should not be taken as an argument against creating a waste re-
location rights system of groundwater quality regulation. The increasing
complexity which may result constitutes evidence that the rights to allo-
cate land, groundwater, and allied resources to steadily higher valued
users and uses is being accomplished through ordinary market processes.
In spite of the apparent complexity, however, protection is granted in
each case by two relatively simple legal rules. First, sales or subdivi-
sions of land are allowed provided that they do not create pollution in the
waters underlying any other owner's land which exceeds the pollutee's
original right of protection (before sale or subdivision) unless he con-
sents. Second, whenever a violation occurs, the pollutee has legal re-
course against the most recent acquirer of land; that is, priority for pro-
tection from liability is given to the owners who are "earliest in time. "
WASTE RELOCATION RIGHTS AND NONLANDOWNERS
Most of the foregoing discussion of the creation of a waste relocation
rights regulatory system—the rights, their enforcement, and their ex-
change—has been limited to owners of land or their assignees, since
most polluters and pollutees would be landowners or lessees of land.
These owners or lessees would include nonprofit associations as well as
the United States Government, all of which would be given every measure
of protection under the waste relocation rights regulatory system that
for-profit owners of land received.
The waste relocation rights system also extends protection to individ-
uals and groups that do not own land. Since waste relocation rights are
tied to land as covenants which may be sold separately from the land,
landowners could transfer those rights to individuals or groups who seek
not to pollute the qualities of groundwater but to preserve and protect
them. Thus, environmental groups having a keen interest in improved
water qualities might buy up important waste relocation rights and hold
them "idle" for any use except pollution. This would be analogous to the
Sierra Club and similar organizations now buying choice redwood stands,
"using" these resources for such activities as recreation and visual en-
joyment rather than for lumber products.
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AN APPRAISAL OF SOME POTENTIAL PROBLEMS
In order for the system of waste relocation rights outlined in this sec-
tion to achieve the optimal level of pollution, it must cope with several
problems at a cost which is relatively low compared to achieving the op-
timal level of pollution control by other means such as discharge permits
or effluent charges.
In general, the problems caused by the characteristics of the ground-
water resource present no greater challenge to the planner of the waste
relocation rights model than to the planner of the discharge permit model
or the effluent charges model, providing that each planner has the same
goal in mind; namely, achieving the economically efficient use of resourc
and thus the optimal level of groundwater monitoring and pollution. This
subsection analyzes the viability of the waste relocation rights scheme in
light of (1) the large number of transactors who would buy or sell rights;
(2) the difficulty of monitoring groundwater pollution and of tracing it to
the correct source; (3) the difficulty of predicting the movement of ground-
water pollutants; (4) the longevity of some of these pollutants; and (5) the
potential for some pollutants to combine synergistically. Each of these
problems presents obstacles (costs) to the effectiveness of the waste re-
location rights scheme. But the crucial question is whether these prob-
lems are more easily managed through waste relocation rights versus
discharge permits or effluent charges.
The Large Number of Transactors
Defining rights to relocate wastes in terms of the overlying ownership
of land raises the question of whether myriad owners of land or waste
relocation rights would greatly increase the costs of exchange. If the
cost of exchange often exceeded its value, then rights would not usually
be allocated to their highest valued use and the economic benefits of the
waste relocation rights system would be lost.
There are two reasons, however, that the large number of transactor
should not hobble the exchange process. First, when two or more par-
ties exchanged waste relocation rights, they would be required by law to
negotiate with (compensate) only those third parties who would be ad-
versely affected by the exchange; that is, those who would incur pollution
in excess of their Py protection rights. This constraint would limit the
number of parties that must legally be brought into any single transac-
tion and reduce the potential number of expensive multisided exchanges.
Second, the number of owners of land or waste relocation rights would
be greater than the number that would use land to pollute groundwater.
(Analogously, oil companies seeking to drill under land that they do not
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own must purchase mineral leases only from the relatively few owners
whose property would overlay the path of drilling. ) The number of trans-
actors would also be reduced since a municipal corporation (a city gov-
ernment) would be considered an "owner of land" as either a polluter of
groundwater or a pollutee. Thus, defining groundwater waste relocation
rights in terms of the overlying ownership of land should not increase the
number of participants beyond those involved under a discharge permit
regulatory system. The same consideration applies to the effluent charges
regulatory system. The agency charged with setting effluent fees would
have to survey and analyze a large number of economic activities in order
to ascertain the optimal degree of pollution and the fee associated with it.
Similar startup costs are involved with the waste relocation rights regu-
latory system in setting the initial Py. But once the initial PJJ have
been determined, the market system is relatively self-regulating at little
public expense provided exchange costs are kept low. This is not so for
either the discharge permit or the effluent charges systems.
The self-regulating character of the waste relocation rights regulatory
system should be emphasized. Although the initial PJJ would be set gov-
ernmentally, they would be modified toward optimal levels through volun-
tary exchanges. This process would be similar to the manner by which
parcels of land are exchanged, subdivided, and recombined into more val-
uable configurations. The price of waste relocation rights would fluctuate
like prices of other resource rights, responding to forces of demand and
supply. The prices would be established through competition among vari-
ous groups in the marketplace. For example, environmental, recreation,
and water-quality organizations would have incentives to bid up the price
of waste relocation rights to use aquifers that are valuable for their pur-
poses. They would "use" these rights by holding them idle—in effect,
preventing pollution by bidding them away from pollution-causing uses
and users and reserving them for conservationist goals. Other groups
such as industrial waste disposers and municipal sewage systems would
bid for waste relocation rights in order to inject pollutants into ground-
water up to the allowable PJJ limits. Whichever individual or group
had the greater demand would offer the owner of the waste relocation
rights the highest price, suggesting that this would be the highest-valued
social use of these particular rights. The advantage of the waste reloca-
tion rights regulatory system is that the quantity of pollution and ground-
water quality monitoring would be determined through impersonal market
forces rather than through the favoritism or lobbying that might accom-
pany an administrative regulatory system.
The large number of transactors in the waste relocation rights scheme
offers two additional advantages. First, there would be so many owners
of rights that the possibility for monopoly gains from their sale would be
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rare. The main economic benefit accruing to owners of large parcels of
land or waste relocation rights would be greater flexibility in planning
their pollution-causing activities because of the greater possible distance
from the point source to the boundary at which pollution could not exceed
the legal P£J maximum. The second advantage in having a large number
of transactors is that a detailed administrative scheme or auction to dis-
tribute the rights to individuals would be unnecessary. This is because
the creation of these rights would be tied to the existing ownership of
land. The only requirement for getting the system into operation would
be a tract index of land ownership and the hydrological-economic infor-
mation necessary for setting initially usable Pj.- limits on pollution.
Traceability
Under the hypothetical waste relocation rights regulatory system, it
is essential that a pollutee be able, at relatively low cost, to trace the
source of the pollution plume to the offending landowner or his assignee.
But tracing groundwater pollution to its precise source can often be ex-
pensive. Monitoring along the edge of the pollutee1 s property may be
insufficient to establish a valid damage claim in court, especially if the
point source is several miles away. Models of groundwater pollution
movements may not be sufficiently accurate to determine the exact source.
Visual inspection of man's activities —e. g., an oil company's brine dis-
posal pit being found "up plume" from a farmer's contaminated well—may
give some clues as to possible sources. Such clues, however, might not
support a court injunction to move the disposal pit, to otherwise dispose
of the brine, or to compensate the owner of the farm land.
Monitoring is intrinsic to the problem of tracing groundwater pollution.
But the difficulty of monitoring is not unique to a regulatory system based
on waste relocation rights. The success of any regulatory system for
pollution and monitoring—including one based on either discharge permits
or effluent charges—ultimately rests on the costs of detecting, tracing,
and predicting groundwater pollution. Thus, monitoring technologies,
costs, and strategies are critical to any regulatory system which may be
adopted. The workability and transactions costs associated with any
chosen regulatory system, including waste relocation rights, will be only
as sound as the quality and cost of the supporting monitoring and modeling
techniques.
Predictability
The question of the predictability of groundwater pollution is a sepa-
rate matter from its traceability to a source. The level of pollution will
vary over time with rainfall and other factors. Although pollution may
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vary around some central tendency, it will not always be inexpensively
predictable. Yet the property definition sets a flat nonstochastic limit of
PJJ, not allowing for seasonal or other variations. Any instance of ex-
cessive pollution, some amount greater than Pji, would be a violation of
duty owed by one rightsholder to another.
This structure of the right is neither unrealistic nor inefficient for at
least three reasons (De Vany et al. , 1969). First, the constraint is a
maximum, not a specific requirement. Second, pollutees would prob-
ably not incur the costs of court action if they expected the increased
pollution in excess of the legal PJJ maximum to be minor or short-lived;
small or infrequent violations, even if they endure for some time, are
unlikely to raise a protest. Third, and most important, to write a sto-
chastic definition of pollution into the property right—for example, that
the maximum Pj,- could not be exceeded by more than 5 percent during
10 percent of the time— would raise the cost of enforcing the right. How-
ever, nothing in the structure of the right prevents the polluter and the
pollutee from voluntarily making a contract providing for a stochastic
limit to pollution.
In sum, it would appear that the problems of the predictability and
traceability of groundwater pollution would become manageable, i. e. ,
sufficiently inexpensive, in the waste relocation rights model only if the
engineering and hydrological sciences provide reasonably accurate and
reliable groundwater pollution quality models. However, this is neces-
sary for monitoring and pollution to be reduced to economic levels under
any regulatory system.
The Large Number of Pollutants
The number of potential groundwater pollutants is large and the types
vary tremendously— from chlorides to chromates to coliform bacteria.
Each may harm aquifers differently depending upon the nature of the
aquifer and the use to which it is put (e. g. , a rice crop is more sensi-
tive to salt pollution than is cotton or soybeans). Determining initial pol-
lution levels when the number of pollutants is so great and the conse-
quences so varied may be a difficult problem, but it is not unique to the
regulation of groundwater pollution through a waste relocation rights
scheme. Any system of pollution regulation— and the monitoring proce-
dures implied by it— must set some permissible levels for each pollutant.
These decisions are made differently under each of the three regulatory
systems.
Under the discharge permit regulatory system, maximal levels of in-
jections are set for each type of pollutant for each polluter, or permittee.
This decision is similar to the maximal limits of P that would initially
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be set under the waste relocation rights regulatory scheme. Hence, the
large variety of pollutants which could make the waste relocation rights
system complex and unwieldy also could cripple the discharge permit
regulatory system. The same type of decision—setting some level of
allowable pollution for a variety of substances and organisms—would be
necessary under each regulatory system. However, the waste relocation
rights regulatory scheme is superior in this regard to the discharge per-
mit scheme. The initial limits for pollution rights must be usable and
valuable for exchange but do not need to be optimal; rights can be ex-
changed and recombined to maintain a continuous optimum over time.
Since the discharge permit system does not provide for exchanges of per-
mits or voluntary and gradual adjustment of pollution levels, greater care
must be taken under this regulatory system to set the initial maxima fair-
ly close to optimality. Second, -the optimum under any system will tend
to change over time as populations, demands, technologies, and climates
change.
A similar relationship exists between waste relocation rights and the
effluent charges regulatory system. The agency charged with controlling
effluents would, in all probability, have to tax not just effluent per se but
different effluents differently. Again, this requires a decision similar
to setting the initial P^ of the waste relocation rights scheme in addition
to setting the effluent charge expected to result in the desired quantity of
each effluent. As with the discharge permit regulatory system, the efflu-
ent charges model requires an administrative agency to determine changes
in the fee as populations and other circumstances change. This discrete
administrative decisionmaking process also compares unfavorably to the
gradual decentralized decisionmaking process associated with the waste
relocation rights scheme.
Although the initial Pji under a system of waste relocation rights
should be determined only after careful hydrological-economic studies,
one might tentatively conclude that to be economically usable they usu-
ally should be slightly in excess of existing pollution levels for aquifers
that are relatively unpolluted. PJJ slightly in excess of existing levels
would give landowners something to exchange and would reduce monitor-
ing costs. The PJJ could be set at less than existing levels so as to be
on the safe side, although this is not recommended since it would impose
large capital losses on many landowners by forcing them to clean up
underlying groundwater. It could also raise monitoring costs drastically.
Longevity of Pollution
Liability for groundwater pollution is complicated under any regulatory
system by the historical distribution of pollution. Pollutants often move
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slowly through aquifers and may not cause harm until years later when
the firm or individual who injected the pollutants is dissolved or dead.
Under the discharge permit regulatory system, protection can be pro-
vided for pollutees only by setting maxima for injections and monitoring
inputs accordingly. Where the future consequences of pollution are ex-
pected to be especially severe, the discharge permit system would re-
spond by lowering allowable inputs further and monitoring even more care-
fully. This response is open to several criticisms. First, the discharge
permit system is cumbersome administratively. In general, it would not
produce the correct value of monitoring information regarding the benefits
and costs of decreased (or, for that matter, increased) pollution. There-
fore, it would generate the optimal degree of pollution only by coincidence.
Second, it is possible that more pollution would result than the administra-
tive agency intended. This additional damage could be the fault of poor
groundwater models, careless monitoring, or conditions beyond the agen-
cy's control (e. g. , unpredictable rainfall). Third, the discharge permit
regulatory system provides no mechanism to compensate pollutees for
any damage incurred years later, especially for damage which is greater
than anticipated administratively. As long as the polluter adheres to the
maximum injections allowed by his permit and monitored by the agency,
the future pollutee has no recourse against either the polluter or the
agency. Fourth, the discharge permit system gives the polluter no incen-
tive to reduce pollution below the maximum level specified in the dis-
charge permit. Discharges below this level are "free" to the polluter
but they may be costly to society at large, especially if the particular
pollutants are long-lived.
Most of these criticisms can also be made against the effluent charges
regulatory system. The polluter would adjust his effluent according to
the specified tax, but the total amount of pollution and the effluent charge
associated with it would both be set adminstratively. The only means by
which the future consequences of long-lived pollution could be taken into
account would be for adminstrators to raise the taxes for these substances.
But fees would be difficult to determine administratively for a variety of
pollutants and difficult to change once set. Under this regulatory system,
any cognizance for future damage must be taken administratively since
the polluter would not be liable for future damage as long as he paid the
full tax associated with his particular emissions. Pollutees would not
be compensated for greater-than-anticipated damages resulting from an
improperly selected level of pollution or from imperfect groundwater
modeling and predictions.
Under the waste relocation rights regulatory scheme, some protection
is provided for future pollutees by linking liability to particular parcels
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of land. This is accomplished by two items of the waste relocation rights
detailed in this section. In item 1 of the right, a polluter may not exceed
the maximum P^ unless these levels are changed through voluntary trans-
actions among rightsholders which do not harm third parties without their
consent or compensation. Hence, liability for pollution in excess of the
level voluntarily agreed to is tied to the particular legally defined land
area. This liability rule becomes a covenant that goes with the land as
part of its title whenever it is sold. The second element of protection to
future pollutees is provided by item 3 of the waste relocation right. This
paragraph gives pollutees injunctive relief and whatever damages they
can prove in a court of law as having been caused by the pollution. Since
courts of law recognize the principle of discounting future income streams
to present value in assessing damages in personal injury or death cases,
they could allow for compounding past damage values to present values
years later in accounting for the damage proved to have been caused by
past pollution to groundwater. The skill of courts in awarding accurate^
damages from pollution would be closely related to the accuracy of moni-
toring and modeling techniques.
The critical distinction among the three regulatory systems is that the
waste relocation rights regulatory system provides some protection to
current rightsholders from historical pollution actions since the symmet-
rical right to pollute and the right to protection from pollution alike are
tied permanently to the ownership or assignment of land.
A prudent buyer of land could reckon with this potential liability in two
ways. First, before purchasing the land, he might ask to monitor ground-
water to determine existing levels. In situations where the value of the
land or the potential liability is large, he might even hire consultants to
perform some modeling to predict future levels. This activity is exactly
analogous to the termite or structural inspection of a home paid for by
the buyer. Second, the buyer could engage in a title search in the cog-
nizant government agency's register for waste relocation rights and lia-
bilities in much the same way that an escrow or title insurance company
is paid by prospective owners to guarantee the title of a piece of land or
a house against debts or other encumbrances. If the waste relocation
rights title search revealed liabilities which were especially costly for
the purpose to which the prospective buyer expected to put the land, then
he would lower or withdraw his offer price for it.
Transacting the Different Pollutants
Although the foregoing analysis has, for simplicity's sake, focused
on transactions involving only one pollutant at a time, the actual number
of pollutants is large. While this might appear to greatly increase
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exchange costs of a waste relocation rights regulatory system, two forces
would work to reduce these costs. First, it is likely that only a few pollu-
tants—perhaps a dozen or less—would be important in any particular geo-
graphical area, For example, a given level of boron and brines might
ruin orange groves in Orange County, California, but would have little
effect on industrial users around nearby Long Beach. This effect would
limit the number of pollutants that pollutees would seek protection from.
The second factor for reducing transactions costs would be exchanges
covering more than one pollutant at once. Nothing in the waste reloca-
tion rights regulatory scheme requires transactors to contract for just
one pollutant at a time. The monitoring, modeling, and legal services re-
quired to consummate one exchange of waste relocation rights for a single
pollutant could be applied to others, "spreading" the lump-sum exchange
costs over a variety of pollution possibilities. The costs of monitoring
actual pollution and of enforcing contracts could be treated similarly.
SynergisHc Pollution
This analysis has treated each pollutant as independent in the damage
it causes; that is, as if the damage caused by pollutant P4 could be sepa-
rated from the damage caused by pollutant Pj20' Nature, however, is
not so simple. In some cases groundwater pollutants combine into fresh
chemical compounds which tend to neutralize the harmful effects that
might be caused by each separately. In such cases pollutees would suf-
fer less harm than in the absence of one or more of the interacting pol-
lutants. Thus, if the limit on one pollutant were technically violated,
the pollutee usually would not take legal action if this "violation" were
neutralized by the presence of some offsetting pollutant in the ground-
water beneath his land. On the other hand, two or more pollutants might
combine to cause the pollutee more damage than either would cause sepa-
rately.
The pollutee is automatically protected to some extent by the waste
relocation right if each of the two (or more) pollutants is generated by
polluter A and if A exceeds the maximum legal limit for either or both
pollutants'. But the pollutee is not protected by the rights system, as it
has been outlined, if A injects two chemicals which combine chemically
to produce damage to the pollutee, provided each injection is within A's
waste relocation rights of P4A and P12OA* Protection of this kind would
require expanding the Pj- list of pollutants to include synergistic com-
pounds for A such as P4A and P12OA' This modification is probably
feasible although it would make the property system more complex.
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Consider next the situation where the TP^. found under the pollutee's
land is traceable to polluter A but the PI20 is traceable to polluter B.
The p'roperty system gives the pollutee recourse whenever ?4A or
separately exceed the legal maximum, but this recourse is limited to
either polluter in isolation. Allowing the pollutee to sue A and B jointly
reintroduces the problem of apportioning liability between the two defen-
dants, but this creates severe legal problems and reduces the possibility
of achieving economically efficient recourse. In this respect, the syner-
gistic combination of pollutants is similar to the problem of intermodu-
lation among different radio emitters operating on different frequencies,
again paralleling the analysis of De Vany et al. , (1969).
Consider also the situation where the pollutee incurs damage even
though A injects P^A and B injects Pj20B in amounts that fall within
the legal maxima. As before, the property system gives the pollutee no
protection against this form of synergistic pollution. This could be change
by extending the "first in time" liability rule to require in these cases that
the most recent polluter either modify his operations or shut down in orde
to restore pollution under the pollutee's land to legal levels. However,
this modification is not recommended for two reasons. First, it would
greatly complicate the waste relocation rights system by requiring initial
levels for not only the P^- pollutants but for combinations of them from
different polluters. This might require modification of some of the rules
for making exchanges, and surely would complicate even the registry re-
quirements of the rights system. The whole system would become less
flexible and transactions costs would increase, especially if there were
some apportionment of liability among different polluters. Second, it
might be difficult for courts to determine what the critical cutoff levels
of synergistic pollution for each polluter would be. Therefore, it appears
undesirable a priori to give pollutees protection from synergistic pollu-
tion beyond that given where individual polluters violate their P^j con-
straints and the harms from synergistic pollution can be traced to these
violations.
The pollutee would still have options for reducing synergistic pollution
even if the system of waste relocation rights did not provide formal pr°~
tection. For example, he could pay A or B to reduce existing synergis-
tic pollutants or to generate nonsynergistic pollutants. If the value of
preventing this damage were less than the cost of making and enforcing
contracts voluntarily, the pollutee's land would probably go unused or be
allocated to other economic activities. This result is not undesirable if
modifying the waste relocation rights system to take into account syner-
gistic relationships between two polluters were to raise transactions and
enforcement costs to the point of reducing overall economic efficiency.
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SITUATIONS INAPPROPRIATE FOR WASTE
RELOCATION RIGHTS
The waste relocation rights regulatory system can cope with most but
not all pollution problems. It can even handle some complex pollution
situations at an increased cost, but several pollution and monitoring prob-
lems appear to be beyond its scope of application.
Pollution involving large numbers of polluters and pollutees may not
lend itself inexpensively to the waste relocation rights paradigm. Where
thousands of septic tanks pollute the water used by hundreds of farmers
"down plume, " it would probably be uneconomic for each farmer to sue
each septic tank owner separately even if pollution were traceable at low
cost to its exact source. The damage caused by each polluter would prob-
ably be small (and hence his liability would be small) relative to the costs
to the pollutee of proving damages. Moreover, the transactions costs
involved in all the pollutees joining together to sue all the polluters might
be great relative to the expected pecuniary gains unless each group were
represented by a municipal corporation. The problem would be more
tractable if both groups were represented by the same municipal corpora-
tion, so that liability is settled through local bargaining and political pro-
cesses.
In the case where polluters or pollutees are unincorporated and the
transactions costs of bargaining or taking legal action are relatively high,
the economic solution appears to be to assign liability by regulations
rather than to rely on market exchanges to determine the optimal amount
of pollution and monitoring. If economic efficiency is the goal of public
policy, then the liability in such cases should be assigned by statute to
the party who can avoid the damage at least cost.
On the one hand, if it would be cheaper to regulate the design of septic
tanks to reduce damage from leakage, then the polluters should legally be
given this responsibility and the costs should be borne by them. Placing
the liability on the owners of tanks would save extra transactions costs
since pollutees would otherwise have to contract with tank owners to re-
duce damage. In this situation groundwater monitoring would amount to
checking randomly on construction standards and leakages, probably by
a public agency in rather the same way that other building code provisions
are enforced. On the other hand, if fewer resources were consumed by
having pollutees either treat the water polluted by septic tanks or adjust
their activities in some other manner, then economic efficiency would
command that they be given responsibility for adjustment. Again, fail-
ure to assign liability in this way would lead polluters to waste resources
in contracting with pollutees to assume liability. In each of these cases,
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economic efficiency requires that liability be in ad e unambiguous and be
initially assigned to the least-cost avoider of the damage.
The waste relocation rights regulatory system could not be expected
to allocate resources efficiently when pollution is not traceable at low
cost to its point source. This matter can scarcely be overemphasized.
Monitoring and modeling for information as to where pollution originates
is essential for efficient resource allocation under this regulatory sys-
tem. Corker's adage that the "effectiveness of law is limited by hydro-
geology" applies equally to the effectiveness of market processes in
allocating waste relocation rights (Corker, 1971).
The waste relocation rights system would also be inappropriate for
pollution problems associated with "common pools." Consider the prob-
lems associated with seawater intrusion in the diagram depicted in Fig-
ure 31. Pumping from A's well lowers the water table to the point where
A and B experience seawater intrusion, with B's salinity in excess of
the hypothetical legal maximum of 300 mg/1 of chlorides. Whether B
has recourse against A depends upon the interpretation of the phrases
"economic activities" and "originally degrade" in item 1 of the original
waste relocation rights definition. A would be liable if the courts inter-
preted these phrases to include a failure by A to take into account the
effect of his pumping on seawater intrusion into the aquifer beneath B's
land. This would be a logical interpretation of the right if B would not
have experienced pollution in the absence of A's pumping, which is con-
sidered to be an "economic activity. " Alternatively, this problem could
be handled under the body of law governing pumping from common pools
rather than the waste relocation rights regulatory system.
B \ OCEAN
Figure 31. Seawater intrusion example.
A final problem that may not be handled inexpensively by the waste
relocation rights regulatory system is pollution caused by nonpoint sources
(such as sewer lines, road salts, etc. ). Assume that a road coincides
with the A/B boundary in Figure 31 and that it is salted during winter to
the extent that more than the legal limit of 300 mg/1 of chlorides is found
in the groundwater under B's land. If the road is owned and salted by A
or B there is no problem in placing liability provided the illegal salinity
can be traced to the salting operation. If the roads are municipally owned
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and salted by a public agency, then liability is still clear, provided that
it is politically feasible for public agencies to assume it.
Since the pollution rights regulatory system gives protection to ground-
water underlying publicly owned land, it would be logical to assign lia-
bility to such public land in the same way that symmetrical rights and
duties are assigned to privately owned land. If this assignment of liabil-
ity is not practical, then landowners could be given protection against
publicly caused road salt pollution only by municipal regulations or State-
imposed regulations on municipalities that limited the quantity of salts
in areas especially prone to saline pollution.
CONCLUSIONS
This section has compared and contrasted alternative pollution regula-
tion systems and highlighted the relative attractiveness of the waste relo-
cation rights system. There is an important relationship between this
discussion and the analysis of monitoring in the remainder of the report.
Both the nature and extent of monitoring are dependent upon the pollu-
tion regulatory system adopted. The nature of monitoring and the value
of resources devoted to it will be different when regulation is by discharge
permits rather than by waste relocation rights. Both systems involve
monitoring for information and for compliance. For example, monitor-
ing by public agencies near sources of pollution would probably be more
common under the discharge permit system; monitoring by private par-
ties near the consequences of pollution would be more common under the
waste relocation rights system.
A virtue of the waste relocation rights regulatory system is that moni-
toring would be done by private parties and would be largely "self-enforc-
ing" through the courts. A large bureaucracy, a large budget, and large
groups of "monitoring marshals" could be avoided while the Nation's
groundwater quality would still be guarded in most situations under this
regulatory system. Instead, private parties would take steps largely in
their own interest to protect their individual waste relocation rights which
would be steps in the national interest as well. Thus, the "privatization"
of most monitoring would not only reduce costs to the general taxpayer
and avoid the difficulties of centralized governmental administration but
be more likely than any alternative to provide an economically efficient
degree of protection to the Nation's groundwater supplies.
93
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96
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APPENDIX
CONVERSION FACTORS
English to International System (SI) conversion factors for units used
in this report follow:
Unit
gallons per
minute
acres
inches
feet
gallons per day
per foot
feet per mile
feet per year
gallons per year
Abbreviation
gpm
not used
in
ft
gpd/ft
ft/mi
ft/yr
gpy
Multiply by
3.785412
0.404 686
2.540000
0.304 800
3. 785 412 x gal
0. 304 800 x ft
0.304 800 x ft
1. 609 340 x mi
0.304 800
3.785412
To find
liters0 per
minute
hectares"
centimeters
meters
liters per day
per meter
meters per
kilometer
meters per
year
liters per year
Abbreviation
Ipm
ha
cm
m
Ipd/m
mAm
m/yr
Ipy
Notes:
°One liter = 0.001 cubic meter
One hectare = 10,000 square meters
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TECHNICAL REPORT DATA
(Please read Instructions on the reverse before completing)
REPORT NO.
EPA-600-4
2.
3. RECIPIENT'S ACCESSION-NO.
TITLE AND SUBTITLE
MONITORING GROUNDWATER QUALITY: ECONOMIC FRAMEWORK
AND PRINCIPLES
5. REPORT DATE
September 1976
6. PERFORMING ORGANIZATION CODE
AUTHOR(S)
Robert L. Crouch, Ross D. Eckert, Donald D. Rugg
8. PERFORMING ORGANIZATION REF
GE75TMP-71
PERFORMING ORGANIZATION NAME AND ADDRESS
General Electric—TEMPO
816 State Street
Santa Barbara, California 93101
10. PROGRAM ELEMENT NO.
1HA326
11. CONTRACT/GRANT NO.
68-01-0759
2. SPONSORING AGENCY NAME AND ADDRESS
Environmental Monitoring and Support Laboratory
Office of Research and Development
U.S. Environmental Protection Agency
Las Vegas, Nevada 89114
13. TYPE OF REPORT AND PERIOD COVERED
14. SPONSORING AGENCY CODE
EPA-ORD
5. SUPPLEMENTARY NOTES
6. ABSTRACT
Discusses the economic considerations in selecting an optimal groundwater quality
monitoring system. Section I argues that poor specification of the property rights
in groundwater is a major cause of excessive pollution. Section II examines
groundwater adjudication and legislation and notes that government intervention
through the authority of PL 92-500 will take the form of government-established
and -enforced groundwater quality standards. Section III discusses the overall
costs and benefits to society involved in groundwater quality monitoring. Section
IV discusses monitoring needs for establishment of quality standards and their
enforcement, and develops a cost-benefit framework for the analysis of groundwater
quality monitoring. Section V examines an alternative regulatory approach based on
"waste relocation rights" for property owners. These rights would protect property
owners' groundwater from pollution by others through specifying allowable pollutant
levels. They would be transferable in the marketplace (like mineral rights) and
enforcement of them would be carried out in the courts.
17.
KEY WORDS AND DOCUMENT ANALYSIS
DESCRIPTORS
b.IDENTIFIERS/OPEN ENDED TERMS
COSATI Field/Group
Groundwater
Economic analysis
Management methods
Water rights
Underground water
Water resources
Economic framework
and principles
Monitoring groundwater
Water pollution
Water quality
08H
13B
14A
18. DISTRIBUTION STATEMEN1
RELEASE TO PUBLIC
19. SECURITY CLASS (ThisReport)
UNCLASSIFIED
21. NO. OF PAGES
104
20. SECURITY CLASS (Thispage)
UNCLASSIFIED
22. PRICE
EPA Form 2220-1 (9-73)
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