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Natural Resource Damage Assessment: Methods and Cases

Natural Resource Damage Assessment: Methods and Cases

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have been provided in the absence of the injury cannot be observed, they must be estimated. One approach is to use services provided in an uncontaminated reference area to predict the services in an injured area. The other approach is to predict such services using historical information on the services in the injured area prior to the injury. It is important, however, to recognize that a ‘with-and-without analysis’ is different from a ‘before-and-after’ analysis. Comparing the services provided by an aquifer before and after an injury may not be a valid method for valuing the damages due to an injury. This method does not account for changes that may have taken place to affect the quantity and quality of the resource. Once the losses of economic and ecosystem services have been quantified, the next step is to assess the value of those changes. Potential changes in services that may occur with groundwater contamination are availability of drinking water, human health risks measured by changes in mortality, morbidity, cancerous and non-cancerous health effects, costs of medical treatment, increased fear and anxiety within a community, averting or defensive expenditures to protect oneself from groundwater contamination, property value loss, ecological injury and loss of recreational use and loss in nonuse values (Abdalla, 1994). Dose-response models that link contaminant sources to changes in contaminants in groundwater and then to changes in economic and ecosystem services may be needed to estimate the damages due to groundwater contamination. The final step in the groundwater benefit estimation process is to assign monetary values to the changes in groundwater services. A number of techniques are available depending on the groundwater services that are being valued. After the economic value of groundwater to an individual is determined, the aggregate economic value is estimated by summing individual economic values over the total number of people who benefit from groundwater services. This requires determining the spatial distribution of consumers and producers who benefit from the groundwater resource. There is no consensus in the literature on how to determine market size, particularly when nonuse values are involved. Since contamination can affect groundwater services over a long time horizon, its total economic value to the current generation is the discounted sum of values in each time period over the entire time horizon required to restore groundwater quantity or quality to baseline levels. Both the length of the time horizon and the choice of discount rate can affect the estimates of groundwater values. Data regarding the quantity and quality of groundwater are imperfect and there is uncertainty about the actual changes in the current level of services projected into the future and the alternative level of services. Thus the change in service flows is an expected change and is not known with certainty. Expected changes in groundwater service flows are a function of possible alternative changes in current and future groundwater conditions and the probabilities of each of those alternatives occurring (Bergstrom et al., 1996). IV. Economic Valuation Methods Many economic methods may be used to value natural resources, although some methods may be more applicable to certain resources than others. Although there may be other methods that can be applied to the task of valuing groundwater, the following list provides an introduction to some of the economic methods that can be used and the complexity involved in applying them. The following methods were chosen because most are authorized for use by the 57

Comprehensive Environmental Response, Compensation, and Liability Act (NRD Task Force, 1998), key legislation that helps to protect groundwater resources. Because of the limited extent of actual use of some of these methods to value groundwater, many of these methods have not been fully assessed for their advantages, disadvantages, and practicality in determining an appropriate value for groundwater. Specific case studies in which some of these methods have been used to value groundwater are included later in this chapter. A. Market Price Method The market price of water can be used to provide a measure of the economic value of a change in the quality or the quantity of groundwater due to an injury under certain restrictive conditions. If the quality of the service flow is reduced due to an injury to it, then the price of water would fall in a competitive market. The change in the market price multiplied by the number of units of flow gives the value of the loss. This assumes that the quantity of water supplied is fixed as in Panel A of Figure 3.1. Suppose the groundwater contamination reduces the quality of the groundwater, which in turn reduces demand for it. The demand curve shifts down from D0 to D1. With a given supply of groundwater, this reduces price from P0 to P1. The area between the two demand curves ABCK shows the extent to which contamination has reduced the value of groundwater. This area can also be approximated by the area P0CKP1. This sum represents the result of the market price method of valuing damages to groundwater. It is estimated by multiplying the fixed quantity of groundwater by the change in the price of groundwater. However, this method is appropriate only if the quantity of groundwater sold in the market, Q0, is not affected by the contamination (that is, the supply of groundwater is fixed and not responsive to its price). If that is not the case and the supply curve of groundwater is instead upward sloping, then Panel B of Figure 3.1 is applicable. A reduction in the quality of the groundwater still shifts the demand curve to the left; however, market price falls by less than the amount by which the demand curve shifts since the supply curve is upward sloping. True damages are still given by the area ABCK. However, in this case the market price method would lead to an estimate of damages only equal to P0CJP1, which would be an underestimate of the true damages. In this case, additional information on the demand curve for groundwater is needed to obtain an estimate of the loss in value of groundwater. In either case, the market price method can only measure consumptive uses of groundwater and thus provides a lower bound on the total economic value of groundwater (NRC, 1997). The advantage of this method is that it is based on observable data and is relatively inexpensive to use. B. Production Cost Technique This technique can be used when groundwater is used as an input into a production process and groundwater contamination affects profits. Suppose that a firm uses groundwater to produce some output whose supply curve is given by S0 in Figure 3.2. Suppose the contamination of groundwater requires the firm to acquire water from a more costly source. This raises the cost of producing the output and shifts the supply curve to the left to S1. At a given output price P0, this reduces the output being produced and the profits of the firm. The reduction in profits is given by the area between the two supply curves, ABCD. 58

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