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Natural Resource Damage Assessment: Methods and Cases

Natural Resource Damage Assessment: Methods and Cases

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household were not significant predictors of willingness to pay. Poe (1998) examined willingness of private well owners to pay for a groundwater protection program that would ensure that nitrate standards remain below 10mg/L in Portage County, Wisconsin. Willingness to pay was found to be significantly positively related to existing nitrate levels in the well, and either age, education, or income. Poe and Bishop (1999) estimated willingness to pay for a groundwater protection program that would reduce nitrate levels in all Portage County wells by 25%. They found that willingness to pay increased with nitrate concentrations, but the rate of increase was diminishing with contamination levels. They also found that nonuse concerns for the health of others had a positive significant effect on willingness to pay. Actual averting actions that have been undertaken did not negatively impact willingness to pay. The estimated willingness to pay for a 25% reduction from 14.5 mg/L was $412 per year per household. This study was based on a well-developed theoretical model of willingness to pay and the researchers provided respondents with information on the nitrate levels in the researchers’ own well. Crutchfield et al. (1997) examined the willingness to pay for installation of a water filter that could either reduce nitrates in tap water to safer levels or completely eliminate nitrates from drinking water to households in the White River Region in Indiana, Central Nebraska, Lower Susquehanna and Mid-Columbia Basin in Washington State. They found that willingness to pay was positively related to income, extra income, and number of years lived in the zip code, but negatively related to age. The higher estimate obtained by Crutchfield et al. (1997) as compared to that obtained by Poe and Bishop (1999) could reflect the incremental benefits of reducing nitrates from safe levels to zero. Hurley et al. (1999) used data from a CV study in Clark and Adams counties in Iowa to determine rural residents’ willingness to pay to delay nitrate contamination of their water supply from large animal confinement facilities by 10, 15, and 20 years. Both counties relied heavily on surface water supplies for drinking water. The researchers found that higher education, income and expected length of time to remain in the community were positively and significantly related with willingness to pay values. Willingness to pay ranged from $118/HH/year for a 10 year delay to $191/HH/year for a 20 year delay by a household with sample mean characteristics. However, the study suffered from a low overall response rate, a small sample of private well users that would be affected by nitrate contamination, and the fact that over 50% of the survey respondents rejected the scenario and stated no willingness to pay for any delay in nitrate contamination. Benefit transfer methods are one way to use these estimated values for policy analysis or for inferring the value of groundwater in other regions. Crutchfield et al. (1995) used benefits transfer methods using the three previous studies summarized in Table 3.3 (Shultz and Lindsay, 1990; Jordan and Elnagheeb, 1993; and Sun et al., 1992) together with farm and county level data for four regions (the White River Region in Indiana, Central Nebraska, the Lower Susquehanna River, and the Mid-Columbia Basin in Washington State) and estimated the benefits of protecting rural drinking water from contamination caused by agricultural chemical residues. They use the data collected from the four regions being studied to substitute for the explanatory variables used in the three original studies and estimated willingness to pay for those 69

Table 3.3: Using Benefits Transfer for Estimating Willingness to Pay Original Study Original WTP $.HH/Yr Transferred WTP Total WTP $/HH/Yr (1.1M HHs, $M) Shults & Lindsay, 1990 $129 $128 $197 Jordan and Elnagheeb, 1993 $120.8 $233 $241 Sun et. Al. 1992 $641 $637 $730 Source: Crutchfield (1995). regions. They found that the benefit estimates after being adjusted for differences in characteristics at the sites of interest were very similar to those obtained by the original studies in two out of the three cases as shown below. Aggregate estimates of groundwater (summed up over the 1.1 million households in the four regions) varied considerably depending on the study that was used to generate those estimates. Giraldez and Fox (1995) also used benefit transfer methods and estimated the cost of controlling groundwater pollution from agricultural use of nitrogen in the village of Hensall in southwestern Ontario. They used three approaches for estimating values for reducing nitrates: value of human life as present value of lifetime average earning, value of statistical life based on wage-risk premiums, and CV. Aggregate values were reported for benefits for the entire village and varied greatly with the assumptions of the analysis resulting in considerable uncertainty about the benefits of reducing nitrate concentrations. Boyle et al. (1994) did a meta-analysis using seven of the CV studies included in Table 3.2 above and one study by Poe (1993). They found that willingness to pay estimates obtained in these studies increase if nitrates were mentioned as a source of contaminant, if the probability of contamination was included in the survey, and as income increases. Willingness to pay was lower if the study primarily focused on use values and higher if cancer risks were mentioned in the study. A limitation of the Boyle et al. (1994) study is the inconsistent definition of groundwater contamination across the studies used in their analysis. VI. Natural Resource Damage Assessments for Groundwater in Practice A. Overview Although academic studies have tended to rely on averting expenditure methods and CV to value groundwater, assessment of damages to groundwater in practice has been based on simpler and more pragmatic methods, such as the market price approach and production cost approach. These approaches rely more on engineering or accounting methods than on economic theory to assess damages. Several states such as New Jersey, Washington, Florida and Minnesota have developed compensation tables or simplified rules to assess damages. These compensation tables are discussed in more detail in Chapter 2 of this report. Here we discuss patterns in groundwater damage assessments done by the states, with a focus on some of the methods used in specific cases. Figure 3.3 uses data from 29 cases from 10 state agencies in which groundwater was one 70

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