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Natural Resource Damage Assessment: Methods and Cases

Natural Resource Damage Assessment: Methods and Cases

Nonuse values are likely

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. 63

area B and computing willingness to pay in area B. Economists prefer the second method since it is based on less restrictive assumptions. Criteria for selection of studies to use for benefits transfer are discussed in Boyle and Bergstrom (1992) and in McConnell (1992) and include considerations of sample size, theoretical appropriateness of the benefits measure used in the original study, correct specification of the valuation equation and availability of data for site B that matches the explanatory variables used in the original study. The third version, meta-analysis, can be used to adjust the willingness to pay estimates obtained using the procedures described above (Boyle et al., 1994). 2 For example, a comparison across studies to see how willingness to pay estimates vary with changes in contamination levels can be useful for adjusting existing benefit estimates for benefits transfer. A meta-analysis is a statistical procedure that treats unique point estimates of willingness to pay from different studies as observations and estimates a meta-function which shows the effect of study or scenario characteristics on willingness to pay. This can be used to determine the extent to which willingness to pay estimates can be explained by characteristics of different studies, for example the types of contaminants, the probability of contamination etc. Relevant scenario characteristics for site B are input into the meta-function to derive a value for site B. The consumptive services provided by groundwater directly or indirectly through discharges to surface water, such as provision of drinking water, irrigation water, water for industrial processing and power generation as well as nonconsumptive uses such as erosion and flood control benefits, can be measured using the market price technique, the production cost method, appraisal method, CV or benefits transfer. Value of human health affected by groundwater quality can additionally be measured by averting behavior and hedonic price/wage methods. V. Results from Past Groundwater Valuation Research Most of the research has focused on groundwater as a drinking water source and estimated damages to human health, fear and anxiety and averting expenditures or avoidance costs. Some studies have used the CV method to estimate use and nonuse values for groundwater. Avoidance cost estimates can be obtained at the municipality level or the household level. At the municipality level these include costs of water treatment that depend on the size of the population served. Nielson and Lee (1987) estimate that annual pesticide removal costs ranged between $67 and $333 per household for water systems serving between 5,000 and 500,000 customers. Walker and Hoehn (1990) estimated the economic damages associated with removing nitrates from groundwater via central or point-of-use treatment. Annual costs for typical rural communities in Michigan were estimated at $40 to $330 per household. A. Averting Expenditure Studies Several studies have sought to determine the value of groundwater by measuring averting 2 A meta-analysis is based on the assumption that underlying preferences and willingness to pay for environmental improvements are the same in the study region and the region to which benefits are being transferred, and that any differences in mean willingness to pay across studies are due to differences in measurable variables. 64

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