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4: Economic Valuation of Ground Water
Pages 68-104

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From page 68...
... The fourth section reviews selected ground water valuation studies with the aim of drawing conclusions about the state of current knowledge of the value of ground water resources. Finally, recommendations are made for using elements of the integrative framework from Chapter 3 and the economic concepts and methods presented here to estimate the value of ground water in specific contexts.
From page 69...
... The travel cost method, in its numerous variants, has been used extensively to assess the value of a commodity used directly by the consumer, namely outdoor recreation. Refinements of the travel cost method and the development of new techniques, such as the contingent valuation method (CVM)
From page 70...
... The Role of Time in Economic Valuation Ground water services, like the services arising from many natural resources, frequently occur over multiple time periods. The rate of conversion of value between time periods is called a rate of time preference.
From page 71...
... Both examples are relevant to the valuation of ground water services. The Value of an Asset An asset, such as a piece of machinery or a ground water aquifer, is valuable because of its contribution to producing a product of value (e.g., agricultural crops or clean drinking water)
From page 72...
... ~. The objective of a private water supply company is to maximize the present value of extraction.
From page 73...
... What is relevant to proper water pricing in a market is the size of the stock relative to demand for it. Anything that increases the demand for the ground water stocks (e.g., population growth or increased allocation of water to produce environmental services)
From page 74...
... This section begins with an overview of two general classes of indirect methods: derived demand and production cost techniques, which impute the value of a nonmarketed environmental input, such as ground water, into a production process; and the opportunity cost approach, which quantifies the economic losses associated with the impacts environmental degradation has on human health. The discussion then turns to more detailed presentations of three techniques that are commonly labeled as indirect methods: the averting behavior method, the hedonic price method, and the travel cost method.
From page 75...
... Does not estimate nonuse values. Difficulty in detecting small, or insignificant, effects of environmental- quality factors on housing prices.
From page 76...
... Does not provide total values (including nonuse values) ex post in nature, limited to assessment of current situation.
From page 77...
... Some of these input-oriented valuation techniques are conceptually similar to the averting behavior approach discussed in the next section, in that a lower bound on the value of water is indicated by what a firm spends to acquire water of acceptable quality. For agriculture, this expenditure may be for energy to pump ground water or for delivery systems to transport water to the site of use.
From page 78...
... demonstrated theoretically under a set of plausible assumptions that without the inclusion of expenditures on averting behaviors, the COI benefit estimation method will underestimate true willingness to pay for a reduction in pollution. Averting Behavior Method Actions taken to avoid or reduce damages from exposure to ground water contaminants are another category of economic losses.
From page 79...
... In many ground water contamination situations, at least one of these assumptions is not likely to hold. Care must be taken in interpreting averting expenditures alone as a lower bound estimate of the value of a ground water function or service.
From page 80...
... , which holds that the purchase of some market good is associated with consumption of an environmental good or service, and when consumption of the market good is zero, then demand for the environmental good or service is also zero (Adamowicz, 1991~. The hedonic technique, like other indirect nonmarket valuation methods, depends on observable data resulting from the actual behavior of individuals.
From page 81...
... Changes in site quality, such as improvements in water quality, fish catch, and so forth, can be estimated using the generalized travel cost model, the hedonic travel cost model, or similar specifications. Because of the flexibility of travel cost methods and the relative ease of collecting data necessary for estimation, researchers have relied extensively on these methods in deriving use values for a wide range of recreational activities.
From page 82...
... While there are a number of variants on these constructed markets, the most common is the contingent valuation method (CVM)
From page 83...
... CVM for Estimating Use and Nonuse Values The contingent valuation method is a direct valuation technique: researchers ask people about their willingness to make certain trades and use the answers to estimate willingness to pay. Its appeal is that it is the only method that (in principle)
From page 84...
... This voting approach is called a dichotomous choice format. Most CVM studies use some form or adaptation of an open-ended question such as: "How much would you be willing to pay in increased fees, taxes, or prices, for q?
From page 85...
... A Special Problem: Estimation of Nonuse Values Nonuse values are the most difficult to measure of TEV components. The contingent valuation method is the only technique available for assessing these values.
From page 86...
... Perhaps because of the increased cost of CVM studies and the continuing controversy surrounding the theoretical basis of CVM-based measurement of nonuse values, NOAA proposed new rules for assessing natural resource damages under the Oil Pollution Control Act of 1990 (NOAA, 1995~. The new proposed rules eliminate "compensable values" in natural resource damage claims and instead focus on actions to restore natural resource services.
From page 87...
... Of the studies that focus on services related to ground water quality, the averting behavior approach has been most commonly used. Ground Water Studies Using the Averting Behavior Method At least five studies have used the averting behavior approach to measure household-level costs associated with ground water contamination.
From page 88...
... 96% knew of drinking water contamination Contaminant in water for 88 weeks 43 % knew of drinking water contamination 7 Communities experienced contamination in past 10 years. 16% of households knew of contamination within last 10 years Private individual well owners with contamination problems that agree to survey Hazardous waste Perchl oro ethyl en e No drinking water standard in effect at time of contamination Trichlorethylene Drinking water standard exceeded Trichlorethylene in 6 communities; diesel fuel in one community (NY)
From page 89...
... Public water supply New (11.1 %)
From page 90...
... Direct Methods: CVM Studies of Ground Water Values CVM, given its potential ability to measure all components of economic value, has been used in a number of studies to estimate ground water protection benefits. Boyle (1994)
From page 91...
... (1995) unspecified Martinsburg, West Virginia unspecified nitrates and option price pesticides WTP for a Well head Protection Program option price NA WTP to remediate contamination from landfills option price WTP to reduce the probability of contamination NA WTP to remediate $114-$163/HH/yr contamination option price WTP to reduce the probability of contamination option price WTP to reduce nitrate contamina tion to safe levels nitrates TCE in 6 communities $815/HH/yr for 25% reduction in risk medians public $65.88/HH/yr private $88.56/HH/yr means public $ 120.84/HH/yr private $148.56/HH/yr option price WTP to prevent nitrate contamination NA option price mean annual WTP current value of $81.31 Mass $42.19 PA diesel fuel in 1 respondents subjec tive perceptions of safety option price $40/HH/yr median WTP protect/ maintain ground water quality means log model $998/HH/yr linear model $930/HH/yr empirical model $961/ HH/yr median for nitrates $21.20/HH/yr median for VOC $ 13.6 8/HH/yr
From page 92...
... CVM offers flexibility and the ability to measure nonuse values of public goods whereas other nonmarket valuation techniques such as the travel cost and hedonic pricing models are intended to measure use values (Powell, 1991~. Most studies to date have focused on the health effects of ground water contamination, without including some other important functions from which humans derive value.
From page 93...
... This vagueness makes it difficult to establish the linkages between changes in ground water policies, ground water conditions, services provided, and estimated values. Of particular concern is the difficulty of ascertaining how the value estimates correspond to actual biophysical changes in ground water resources and the resulting service flows.
From page 94...
... Since many of the studies focus on option price (McClelland et al., 1992; Caudill, 1992; Edwards, 1988; Jordan and Elnagheeb, 1993; Poe, 1993; Poe and Bishop, 1992; Powell, 1991; Shultz, 1989; Sun, 1990; Sun et al., 1992) , it is imperative that the baseline condition is well defined so that researchers can determine the welfare change from the initial condition to the proposed change.
From page 95...
... The CVM's ability to measure use values is generally accepted in the economics profession. Its ability to capture nonuse values remains controversial, even though the NOAA panel defined conditions under which CVM may generate reliable estimates of such values (e.g., adequate survey design and commodity definition)
From page 96...
... Very little empirical research has been devoted to establishing a minimum standard of information adequacy for CVM studies (Poe and Bishop, 1993; Powell, 1991; Boyle, 1994~. The question remains as to what type of information should be presented to respondents and how that information affects estimated
From page 97...
... indicates the challenges inherent in benefits transferability with ground water resources. While complete transferability of benefits estimates is an impossible goal given the site-specific nature of most ground water valuations, the debate itself is leading to collaborative interdisciplinary efforts which may create benefits in and of themselves.
From page 98...
... Existence value 6. Bequest value Cost of illness Averting behavior Contingent valuation Contingent ranking/behavior Averting behavior Contingent valuation Contingent ranking/behavior Derived demand/production cost Derived demand/production cost Production cost techniques Contingent valuation Contingent ranking/behavior Dynamic optimization Contingent valuation Contingent ranking/behavior Production cost Hedonic pricing model Contingent valuation Contingent ranking/behavior Travel cost method Contingent valuation Contingent ranking/behavior Contingent valuation Contingent ranking/behavior Contingent valuation Contingent ranking/behavior SOURCE: Adapted from Freeman, 1993.
From page 99...
... · Previous ground water valuation studies have focused primarily on a small part of the known ground water functions and services (identified in Chapter 3~. Thus current empirical knowledge of the values of ground water is quite limited and concentrated in a few areas, such as extractive values related to drinking water use.
From page 100...
... · In some circumstances the TEV is likely to be largely composed of nonuse values. At the current time, pending documentation of large and pervasive nonuse values for ground water systems, this appears to be most likely when ground water has a strong connection to surface water and a decision will substantially alter these service flows.
From page 101...
... 1990. The contingent valuation method.
From page 102...
... 1995. Contingent Valuation of Protecting Groundwater Quality by a Wellhead Protection Program.
From page 103...
... 1992. Measuring the benefits of groundwater protection from agricultural contamination: Results from a two-stage contingent valuation study.
From page 104...
... 1995. Assessing the accuracy of benefits transfers: Evidence from a multi-site contingent valuation study of groundwater quality.


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