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Natural Resource Damage Assessment: Methods and Cases

Natural Resource Damage Assessment: Methods and Cases

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irrigation after contamination. Suppose further that the rights for drinking water and irrigation are valued at $2,500/acre foot and $50/acre foot respectively. The value of damages is obtained by multiplying the volume of water injured by $2,450 (=$2,500-$50). This represents the diminished market value of a perpetual-use right for one acre-foot of local groundwater. Market prices are determined with the help of local water brokers. To use this method, however, groundwater must have a predetermined value, and its quality before contamination must be known. Although this method only captures use values, the advantage is that given the value of the resource with and without contamination, it is relatively easy to determine the value lost due to pollution (NRD Task Force, 1998). D. Cost-of-Illness Method Groundwater contamination can lead to long term or chronic illnesses and possibly death. This method involves estimating the expenses resulting from illness and the lost earnings due to sickness. The limitations of this method are that it does not consider the disutility caused by illness. It also does not take into account that individuals faced with contamination undertake defensive or averting expenditures to protect themselves. This method will therefore underestimate the true willingness to pay for pollution reduction. E. Averting Expenditures Method Averting-expenditure analysis relies on observed data on expenditures incurred by individuals to avoid consuming contaminated water. Examples include the purchase of bottled water and water filters if groundwater is being used as a source of drinking water. How much people are willing to spend on these items to avoid contaminated water helps to determine the value that they place on good water quality. A drawback of this method is that it does not take into account all losses from the contamination of the resource. This method can provide a lower bound for willingness to pay if the following assumptions hold: averting actions are perfect substitutes for pollution reduction; the household does not obtain any direct utility from averting behavior; there are no income effects because of loss of work through illness; averting behavior does not require significant fixed costs such as drilling new wells. This method is easy to implement and it is relatively inexpensive to obtain the information required (Abdalla, 1994; 1991). It must, however, be noted that the average expenditure on avoidance by those who chose to undertake that expenditure is not a measure of the average value for the entire population since it does not incorporate the lack of expenditure by some portion of the population who are either unaware or chose not to spend on avoidance. The appropriate average avoidance cost measure for the entire population should average expenditures over all individuals including those with zero expenditures. Additionally, averting expenditures are based on an individual’s expectations regarding what the government (or others) will do to reduce an individual’s exposure to contamination. Low expenditures may simply reflect the expectation that the problem will be addressed publicly and rather than a low value for groundwater (Segerson, 1994). F. Travel Cost Method 61

Travel-cost analysis can be used for determining the value of groundwater if it enhances the value of outdoor experiences by recharging surface water supplies, such as lakes or wetlands, from which recreational value is derived. This method examines the travel costs, in terms of money and time, which people incur to travel to a specific site or resource. Changes in the environmental quality of an area may change the demand for that resource and imply a lower value for the resource. An advantage of this method is that it uses actual behaviors and preferences. The major disadvantage of this method for valuing groundwater is that it is difficult to determine the share of recreational value that can be attributed to groundwater alone (NRC, 1997). G. Hedonic Pricing Method Yet another method of valuing groundwater is hedonic price analysis, which is based on the premise that people value a good because of the attributes of that good rather than the good itself. The hedonic pricing method can use market data (such as housing values) to determine the implicit price of groundwater, by examining the differences in property values of houses with different environmental attributes (such as groundwater quality and proximity to wetlands) while controlling for other factors that might explain differences in property values. An advantage of this method is that, like the travel cost method, it measures actual behaviors and preferences. A disadvantage of this method is that the connection between the groundwater quality for each house, if known, and real estate price may be technically complex or unclear (NRC, 1997). Additionally, like the travel cost method, this method values only use values and does not consider nonuse values. H. Contingent Valuation (CV) Method CV involves eliciting the value of a groundwater resource by using a survey or questionnaire that assesses an individual’s willingness to pay for that resource. The questions are usually hypothetical. The survey first provides a scenario of groundwater contamination. This scenario may take an ex ante perspective by including a probability of contamination or an ex post perspective by presenting the effects of groundwater contamination. After the scenario is presented, respondents are asked what they would be willing to pay to achieve or avoid the given scenario. This is the only method that can be used to estimate use values and nonuse values. Final regulations promulgated in 1994 by the Department of Interior (DOI) define nonuse values as values that are not dependent on the use of the resource. These values include an existence value, which is the value of knowing a resource exists and a bequest value which is the value of knowing that a resource will be available for future generations (59 Federal Register 14263). There are a number of problems associated with obtaining unbiased and valid value statements from individuals using the CV method (NRC, 1997; Diamond and Hausman, 1994; Freeman, 2003). These include errors due to misrepresentation of values, the hypothetical nature of the scenario, lack of connection between willingness to pay and budgets, and insensitivity of responses to the scope of the nonmarket good being measured. For familiar goods like drinking water, this method has been shown to compare favorably with other nonmarket valuation techniques such as travel cost and hedonic methods (Mitchell and Carson, 1989). However, using this method for estimating nonuse values is controversial. 62

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