Natural Resource Damage Assessment: Methods and Cases

Nonuse values are likely to be more important for unique or rare resources and for
irreversible changes. Resources such as ordinary streams or lakes are not likely to generate
significant nonuse values because of the availability of close substitutes (Freeman, 2003). Final
regulations put forth by DOI in 1994 and the National Oceanic and Atmospheric Administration
(NOAA) in 1996 state that only reliably calculated values should be included in estimates of
compensable value. This is particularly difficult in the case of nonuse values for groundwater
because unlike surface resources, groundwater is not readily visible and people lack experience
with it. Studies have shown that people have misconceptions about the nature of the groundwater
resource, the speed with which groundwater moves, and whether contamination can be contained
(Mitchell and Carson, 1989). These misconceptions make it more difficult to measure nonuse
values for groundwater.
I. Benefits Transfer Method
Benefits transfer uses information from existing studies to develop use and nonuse values
for groundwater. Suppose existing CV studies have obtained the willingness to pay at one or
more sites for protecting groundwater quality and related it to variables such as income,
demographic characteristics, probability of contamination, and so forth. Then a benefits transfer
procedure can be used to transfer the benefits developed at the original site(s), A, to the new site,
B. It is based on the assumption that individuals in area A have the same underlying preferences
as in area B. The validity of the estimates however, will depend on the quality of the original
studies and on errors associated in transferring these estimates to the policy site 1 . The advantage
of this method is that it is relatively fast and inexpensive. There are three versions of this
method.
The first version is called a “point transfer” and involves transferring the average
willingness to pay obtained for study site A to a new site B. Adjustments can be made to the
willingness to pay estimate based on the characteristics of the original site and the new site and
on the socioeconomic and demographic characteristics of the affected population. The
application of this method requires an assessment of the relevance of the commodity being
valued in the original study and at the new site B. The quality of the original study in terms of
sample size, response rates and significance of findings in statistical analysis should be evaluated
before undertaking a point transfer of values.
The second version involves a weaker assumption that the preferences of residents in A
are the same as those of residents in B, but the socio-demographic characteristics are different
between the two populations. In this case, one uses a “transfer function” to estimate willingness
to pay while controlling for differences in demographic characteristics (Crutchfield et al., 1997).
This is done by using the willingness to pay relationships estimated for A and substituting data
about socio-economic and other characteristics of individuals or group means for variables in
1 McConnell (1992) lists five main sources of error in estimating benefits in the study site A. These include choosing
the wrong functional form for the benefits function, omitting important variables in the benefits function, measuring
the dependent and independent variables incorrectly and misspecifying the random process that generated the data.
Sources of error in the calculation of benefits at site B include errors of aggregation in calculating group means for
the independent variables, errors in calculating the number of affected households and the extent of the market for
the environmental service being valued.
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