Evaluating Benefits and Costs of

Changes in Water Quality

Jessica Koteen, Susan J. Alexander, and John B. Loomis

United States

Department of

Agriculture

Forest Service

Pacific Northwest

Research Station

General Technical

Report

PNW-GTR-548

July 2002
Jessica Koteen is a consultant with Sapphos Environmental, Inc., 133 Martin Alley,

Pasadena, CA 91105; Susan J. Alexander is a research forester, U.S. Department of

Agriculture, Forest Service, Pacific Northwest Research Station, Forestry Sciences

Laboratory, 3200 SW Jefferson Way, Corvallis, OR 97331; and John B. Loomis is a

professor, Department of Agricultural and Resource Economics, Colorado State

University, Fort Collins, CO 80523.

Authors
Koteen, Jessica; Alexander, Susan J.; Loomis, John B. 2002. Evaluating benefits

and costs of changes in water quality. Gen. Tech. Rep. PNW-GTR-548. Portland, OR:

U.S. Department of Agriculture, Forest Service, Pacific Northwest Research Station.

32 p.

Water quality affects a variety of uses, such as municipal water consumption and

recreation. Changes in water quality can influence the benefits water users receive.

The problem is how to define water quality for specific uses. It is not possible to come

up with one formal definition of water quality that fits all water uses. There are many

parameters that influence water quality and that affect benefits to water users. This

paper examines six water quality parameters and their influence on six water uses.

The water quality parameters are clarity, quantity, salinity, total suspended solids,

temperature, and dissolved oxygen. Changes in these parameters are evaluated to

determine values for municipal, agricultural, recreational, industrial, hydropower, and

nonmarket uses of water. Various techniques can be used to estimate nonmarket

values for changes in water quality, such as the travel cost method, the contingent

valuation method, and the hedonic property method. The data collected on changes

in water quantity per acre-foot and its effect on recreationists’ benefits were analyzed

by using multiple regression in a meta-analysis. Results from the regression were

used to analyze changes in consumer surplus for particular activities and uses for

an additional acre-foot of water. Information in tables is included to provide empirical

evidence as to how certain water quality parameters affect a particular use. The tables

provide values from previous studies and the valuation techniques used in each study.

From these values, we find mean values of changes in water quality and how this

change monetarily affects the use in question.

Keywords: Dissolved oxygen, instream flow, nonmarket values, recreation, salinity,

water clarity, meta-analysis.

Abstract
Contents 1 Introduction

1 Valuation

3 Nonmarket Valuation Techniques

6 Water Quality Parameters

6 Total Suspended Solids

6 Dissolved Oxygen

7 Temperature

7 Salinity

7 Water Clarity

7 Water Quantity

8 Water Uses

8 Municipal Water Use

11 Agricultural Water Use

15 Recreation Use

17 Water Quantity and Recreation Meta-Analysis

19 Industrial Water Use

20 Hydropower Water Uses

22 Nonmarket and Nonuse Values

25 Conclusion

25 Metric Equivalents

28 Literature Cited
1

Introduction

Valuation

Many activities in our national forests can affect water quality, resulting in a change

in water quality to downstream users. Management strategies can decrease or improve

water quality for downstream users. Changes in benefits to producers and consumers

resulting from a change in quality of national forest water can be measured. One purpose of this paper is to define uses of water and the parameters necessary for the

definition of water quality depending on the particular use. Once the parameters are

defined, changes in benefits can be evaluated as water quality changes. The various

methods that can be used to estimate changes in benefits from a change in water

quality are discussed and related to each of the uses.

National forest land is the largest single source of water in the United States and

contributes water of high quality. According to one estimate, the calculated marginal

value of water from all national forest lands equals at least $3.7 billion per year, with

the Pacific Northwest contributing an estimated $950 million (USDA Forest Service

2000). Water withdrawals to offstream uses, including farms, industry, and homes,

have increased over tenfold in the 20th century. Streamflows have dropped, while demands for instream water have increased for water-based recreation and protection

of water quality (Brown 1999).

The concept of commensurability entails measuring all market and nonmarket values

from the same conceptual framework. Market and nonmarket valuation of water depends

on how the water is used, e.g., for recreation, for industry, and so on. Willingness-to-pay

as a measure of benefits is the most fundamental measure of economic value, whether

it is market, nonmarket use value, or even nonmarket “nonuse” value, such as existence

value. Consumer and producer surplus are measures of benefits, and can be quantified

by willingness-to-pay or willingness-to-accept of consumers and producers, respectively.

Consumers may pay less than the maximum they are willing to pay for a good; therefore

we measure the consumers’ benefit (consumers’ surplus) for a particular good as the

total willingness-to-pay minus the actual cost. Producer surplus is similar in concept

to consumer surplus. Producer surplus is the benefit to the producer above the cost of

production. Producer surplus is often referred to as net revenue, or profit. Theoretically,

producers are willing to supply the first few units of a good at a price above the cost of

producing the good but less than the market price. The net revenue, or profit, is a measure of the producers’ benefit from receiving the same market price on all units sold, even

the first few, which they would supply for less.

Market goods are products that are produced and sold in a formal market, such as

bottled water, in which prices reflect the interaction of supply and demand. The marginal

value of a market good to a consumer is the price, and it measures the willingness-topay for one more unit. This is reflected in the demand curve, also known as the marginal

benefit curve. The marginal benefit curve shows the added benefit, or value, of each additional unit consumed. Owing to the property of diminishing marginal utility, the marginal

benefit curve is downward sloping because benefits increase at a decreasing rate as

one consumes more of a particular good in a given period.

Estimation of both consumer and producer surplus requires estimation of a demand and

supply schedule. A demand schedule shows the relation between price and quantity

demanded. In figure 1, the demand curve (D) is also the marginal benefit (MB) curve.

The downward slope means that for every additional unit consumed, the marginal benefit

of consumption of each additional unit of (Q) diminishes. The total value of consumption

is the area under the marginal benefit curve up to Qm. If the price of the good is Pm,

the consumer demands Qm amount of the good. By deriving the demand curve, we can
2

Figure 1—Producers’ and consumers’ surplus.

measure the gross benefits, and depending on the actual cost of the good, we can

calculate the consumers’ surplus. A supply schedule shows the relation between price

and quantity supplied. If a good has price Pm, the producer supplies quantity Qm of

that good. The supply curve is the sum of the marginal costs (åMC) of producing the

good. The marginal cost curve is upward sloping because as more of a good is produced in a given period, the cost of producing the additional units increases. The total

cost to the producer is the area under the marginal cost curve up to Qm.

In a competitive equilibrium, Qm of the good is produced at price Pm. The consumer

surplus (CS) is the amount the consumer is willing to pay less what they actually pay

for the good. The producer surplus (PS) is the net benefit to the producer for supplying

the good. The producer charges price Pm per unit for the good. Total revenue to the

producer is the entire shaded region. The cost to the producer is the area under the

marginal cost curve up to Qm. The net revenue to the producer is the producer surplus

(PS). The total benefit to society is the producers’ surplus plus the consumers’ surplus.

The value of a market good can be measured nonmarginally by calculating total value.

By deriving both the demand and supply curves, we can find the consumer and producer

surplus. Total consumer surplus added to total producer surplus gives total net value.

Total net value will be much larger than marginal value, or price, because marginal value

just measures willingness-to-pay for the last unit consumed.

In many cities, a change in quality of the input water does not affect the price, quality,

or quantity of drinking water for consumers. Rather, it affects the cost of maintaining

acceptable water quality. The benefit change is measured by the change in producer

benefit, or producer surplus, given an improvement in the quality of the input. Freeman

(1979) shows that a change in input quality affects the marginal cost of production,

given that the change in environmental quality affects only the producer and output price

does not change. If it is assumed that the price and quantity of water are fixed, benefit

of improved water quality comes in the form of decreased cost of production, which

benefits the producers in the form of profits.
3

Nonmarket values are estimated to assess goods and services that are not bought or

sold in a formal market. Nonmarket values include nonuse values, such as the value

that individuals obtain from knowing that a species exists or that a river is healthy even

though they do not have any intent to visit the place in the future. Valuation of water

resources and water quality improvements can use either market or nonmarket techniques, or some combination of both. The methods used will differ by water use.

Contingent valuation is used to estimate values people place on changes in a natural

resource in the context of a hypothetical market, through the use of surveys. People’s

total willingness-to-pay for increases or decreases in a natural resource can include

current personal use values, possible future use values (option values), and future

generation use values (bequest values) (Jordan and Elnagheeb 1993). Total willingnessto-pay also can include existence values, which involve gains people obtain from the

good for various reasons other than their personal use (Mitchell and Carson 1989). Contingent valuation methods use these simulated (hypothetical) markets to identify values

similar to actual markets (Loomis and Walsh 1997). A respondent is faced with a survey

or questionnaire that supplies a variety of information, including detail about the good.

The current state of the resource is described, and a description of the improvement is

provided. The respondent is asked a willingness-to-pay question regarding an improvement. A method of payment, such as a tax or an increase in a bill, is clearly stated in

the survey so respondents are aware of how they would pay for the improvement.

The goal of contingent valuation is to induce people to reveal their willingness-to-pay

for the provision of a nonmarket good such as environmental quality (Ribaudo and

Hellerstein 1992). With information provided by the respondents, a change in welfare

can be estimated for a change in water quality. For example, a contingent valuation

survey can ask respondents what would be the largest sum they would be willing to pay

to install and maintain equipment to ensure their drinking water is of particular quality.

The aggregate willingness-to-pay can serve as an estimate of benefits to consumers

from improvements in drinking water quality (Jordan and Elnagheeb 1993).

The travel cost method can be used to measure the value of water quality based on

people’s actual recreation trip behavior. A demand curve is estimated based on out-ofpocket expenses such as traveling to a recreation site. The travel cost method allows

the derivation of a demand curve for particular recreational sites based on expenditures

and time cost of travel for a cross section of users. The demand curve is typically

generated by regressing the number of visits to the site against travel cost and other

exogenous variables. Higher travel costs lead to fewer visits, other things being equal

(Ribaudo and Hellerstein 1992). In figure 2, the number of trips demanded is Q. As

costs per trip increase, the demand for recreation to the site will approach zero.

Two main categories of travel costs are transportation and travel time. Transportation

costs include out-of-pocket expenditures such as gas, food, entrance fees, and any

other costs incurred traveling to the site and back. Such things as car insurance or

durable equipment used in the recreational activity are not included because these

costs have to be paid even if the trip was not taken. The second main type of cost,

travel time, is accounted for in the demand function by using time directly as a variable

(hours spent traveling) or by using hours times a fraction of the wage rate. Time spent

traveling to the recreation site is an opportunity cost, and the wage rate is used as a

proxy for time (opportunity) cost. Time cost is then incorporated into the model to

derive the demand function. As travel time or transportation costs increase, the number

of trips to the site will decrease.

Nonmarket

Valuation

Techniques
4

To compare visitation at sites with varying water quality, data are pooled on visitation

from several sites that differ in water quality but are similar in other attributes, such as

activities performed and quality of facilities. The per capita demand for visits to the

different recreation sites, taking into account the transportation costs and travel time,

is compared to assess the changes in trips per year as water quality improves. The

demand curves are overlaid to measure the changes in benefits with changes in water

quality. In figure 3, demand for recreation at two sites is compared. Line D1 is the demand curve for a site with poor water quality, and D2 is the demand curve for a site with

higher water quality. With a constant travel cost (TC), the number of trips increases

from T1 to T2. The shaded region is the change in consumer surplus with a change in

water quality at similar sites.

Hedonic pricing techniques have been used in various applications to estimate prices

of nonmarket amenities that may be capitalized in the price of a housing unit (Michael

and others 1996). These nonmarket amenities include a variety of attributes, such as

earthquake risk and water quality. Hedonic property models have been applied to

measure the effects of water quality on property prices. Differences in property values

can be used to measure benefits from higher water quality or changes in water quality.

To obtain a demand curve for water quality improvements from the hedonic technique,

it is necessary to use the hedonic technique with multiple markets. The utility derived

from portions of a river that vary from poor to good water quality, owing to local patterns

of dischargers, can be compared. Benefits obtained from improvements in water quality

can then be estimated. Necessary information includes property values, structural and

locational characteristics, and appropriate measures of water quality.

It has been estimated that a decrease in water quality significantly depresses property

prices surrounding a lake or river. Changes in the quality of water are likely to affect the

enjoyment of households owning property on or near the shoreline (Freeman 1979).

The value of the property reveals information about the benefits property owners receive

from water quality improvements. However, as Freeman states, property values derived

from analysis of housing costs reflect benefits to property owners, but not to others.

For some water bodies, nonresident use is substantial. Regardless of the limitations,

Figure 2—Travel cost method demand curve and consumer surplus.

CS

Travel cost

Trips per season

Trip cost

Q
5

the hedonic method is important because it has in many instances been a good estimator of the benefits obtained from improvements in water quality by local residents living

adjacent to or near a particular water body.

A hybrid hedonic travel cost method was developed by Brown and Mendelsohn (1984)

that combines hedonic procedures with the travel cost method. The hybrid method consists of a two-step process. First, the price individuals from each origin zone (zones

that are developed to distinguish the distance that individuals travel to the site) must

pay to obtain each characteristic of the experience or recreational activity is estimated

(Loomis and Walsh 1997). Separate regressions are then run for each of the zones.

The quantity of characteristics and recreation activities are independent variables

(Brown and Mendelsohn 1984).

Random utility models are a type of travel cost method that models the probability of

choosing a particular recreation site on any given recreation choice period (e.g., weekend). Predictions are based on the relative utility of each site compared to the others.

Both location (i.e., distance or travel cost) and quality are factored into these probabilities (Alexander 1995).

Contingent behavior is a hybrid system between the travel cost and the contingent value

methods. Contingent behavior determines how visits to recreation sites change with

quality attributes. The method was designed to measure recreational values for a hypothetical change, such as dam removal resulting in provision of river recreation opportunities, in areas where river recreation is not currently occurring (Loomis 1999). Contingent

behavior analysis is also useful in situations where recreational activity is already occurring, as the travel cost method can be used to assess current activity, and a contingent

behavior analysis can be developed in conjunction with the travel cost analysis to assess a hypothetical change. For example, a contingent behavior survey could be distributed to households within the region of a recreational facility, questioning willingness

to pay to visit the water source to recreate if water quality improved. The survey would

ask how many times a year they would visit, and gather information on travel time and

transportation costs.

Figure 3—Demand curves for sites with varying water quality.

D1 = Demand with current water quality 

T1 = Current number of trips taken 

D2 = Demand with improved water quality 

T2 = Trips taken with improvement in 

 water quality

Trips per season

Trip cost

D1 D2

T1 T2

Change in 

consumer 

surplus
6

The six water uses examined in this paper are municipal, industrial, hydropower,

recreation, agricultural, and passive use, or instream flow. The U.S. Geological Survey

(USGS) has estimated the Nation’s water use since 1950, from groundwater, fresh

surface water, and saline surface water. Brown (1999) chose six water use categories

from the USGS data to report national water demand: (1) livestock; (2) domestic and

public; (3) industrial, commercial, and mining; (4) thermoelectric; (5) irrigation; and

(6) hydroelectric power. We chose the former categories as they more closely follow

the valuation literature.

As there are many different uses of water, it is not possible to come up with a single

definition of water quality. Each water use has optimal water quality requirements that

are often unique. For example, municipal water, used for drinking and bathing, requires

low sediment levels. Water quality requirements for instream recreation depend on the

activity. Boating does not require a low sediment level, but swimming does. People

who engage in rafting are more concerned with water quantity. Fish require particular

temperatures, and water quantity is important for recreational fishing. Water quality is

measured by using some combination of water quality parameters. The parameters of

water quality we will discuss are total suspended solids, dissolved oxygen, temperature, salinity, clarity, and quantity.

We will define each of the water quality parameters and discuss the importance of each

one. We will then relate the parameters to the individual water uses. This discussion

will enable us to discuss how to value water quality improvements.

Water with a low amount of suspended solids is important to many water uses. Although amount of total suspended solids is important for recreational uses, the degree

of importance depends on the activity. For instance, swimming requires a low amount of

suspended solids, whereas many of the rivers famous for whitewater rafting such as the

Colorado River, have a high sediment load. This does not mean that the level of total

suspended solids is not important in rafting; it is just less important than for swimming.

Total suspended solids is measured as dry weight of particulates. Both organic and

inorganic materials contribute to total suspended solids. Suspended solids can affect

the aquatic environment and its organisms by damaging macroinvertebrate communities

through deposition, by reducing the abundance of food for fish, by directly affecting fish

growth and resistance to disease, and by reducing the areas available for spawning and

interfering with fish egg and larval development (Hach Company 2001). Furthermore, the

deposition of organic matter can remove dissolved oxygen, an important element in

high-quality water. A major source of total suspended solids in natural waters is runoff

from urban and agricultural areas.

Dissolved oxygen, gaseous oxygen (O2) dissolved in an aqueous solution, is an important indicator of water quality. Oxygen is necessary to all aerobic forms of life,

which provide stream purification. Dissolved oxygen is critical for fish and other water

inhabitants. Generally, waters with dissolved oxygen concentrations of 5.0 milligrams

per liter (mg/L) (equivalent to 5 parts per million (ppm))1 or higher can support a wellbalanced, healthy biological community. Some species, however, cannot tolerate even

Total Suspended Solids

Dissolved Oxygen

Water Quality

Parameters

1 One milligram per liter is the same as one part per million for

water solutions when the specific gravity of the solution is the

same as pure water under standard conditions. This is assumed

to apply to low-concentration solutions.
7

slight depletion, and when concentrations fall below critical levels, the result is often

a complete alteration of the community structure. The consequences of changes in

dissolved oxygen frequently have both ecological and economic significance. As

dissolved oxygen drops below 5.0 mg/L, aquatic life is put under stress. The lower

the concentration of oxygen, the greater the stress. Oxygen levels that remain below

1 to 2 mg/L for a few hours can kill many fish. Note, however, that some systems with

“good” water quality exhibit naturally low dissolved oxygen concentrations (e.g.,

wetlands) (Hach Company 2001).

Nonmarket values and activities are dependent on adequate oxygen. Nonuse values,

such as habitat quality, and use values, such as fishing, are uses of water for which

dissolved oxygen is an important parameter. A change in dissolved oxygen could cause

a decrease in fish catch, decreasing the quality of a fishing experience.

Water temperature is very important to many water uses. It affects chemical interactions and reactivity in the water column. Temperature also affects biological activity;

many aquatic organisms have strict temperature requirements. The temperature of

water in entire watersheds may become elevated by steam-electric generating plants

and other industries that use water to cool industrial processes (Gibbons 1986). If the

heated water is discharged back into the stream, it disrupts the aquatic ecosystem,

and damages fish habitat and wildlife. This practice is prohibited by the 1977 Clean

Water Act and therefore is no longer seen as a threat to ecosystems. Cost of cooling

the water before disposal was about $10 per acre-foot in a study by Young and Gray

(1972). Forest activities that can affect water temperature include overstory removal,

enhancement of riparian vegetation, and revegetation activities. Removal of riparian

vegetation is commonly believed to increase water temperature, but in particular circumstances can allow for water temperature reductions. Activities that change stream

configuration also can affect water temperature, such as structures or vegetation that

reduce channel width and increase channel depth and water velocity.

A river most often increases in salinity by flowing over salt deposits or picking up

nonpoint agricultural runoff high in salt content. Removing salts from watersheds is

an expensive process. Almost all water uses are adversely affected by salinity. It is

estimated that every 1-ppm increase in salinity causes $230,000 worth of damage for

agricultural, municipal, and industrial users (Gibbons 1986) in reduced crop yields and

damaged appliances and industrial machinery (Kleinman and Brown 1980). Thus, the

benefit of decreasing water salinity may outweigh the cost.

Water clarity is not generally termed pollution, so the importance of water clarity in

benefit measurement has to do primarily with aesthetics. Water clarity also determines

the depth of light penetration and thereby the structure of habitats at various depths.

Water clarity has both nonmarket and recreational use values.

The quantity of water is important in many water uses, such as healthy habitats and

recreation opportunities. Water quantity can either be too high or too low depending

on the use. Water quantity is often a contributing factor to all the parameters of water

quality previously mentioned. For example, as the quantity of water decreases, temperature may increase. On the other hand, as water quantity increases, salinity levels

can decrease per unit of water. Aside from the relations of other parameters to water

quantity, quantity alone is important to many uses. Daubert and others (1979) reported

Temperature

Water Clarity

Water Quantity

Salinity
8

a quadratic relation between water quantity and fishing benefits. They studied the value

of fishing, shoreline recreation, and whitewater activities in the Cache la Poudre River,

Colorado, during summer 1978. At moderate flows, recreational fishing value was higher

than at higher flows. This may not be the case in boating, where value may increase

with increasing flows up to a point.

Consumption of water for municipal purposes is less than 10 percent of total water

consumption in the United States, although it is often perceived as the most vital or

important water use. Municipal water demands are usually described in three categories: residential, public, and “other” uses. Residential water is used, for example, for

watering lawns, bathing, drinking, and cooking. Public water use includes firefighting

and maintenance of public buildings and grounds. Other uses of municipal water are

commercial and industrial water consumption by the general public, such as in restaurants and stores (Gibbons 1986).

There are many factors that influence the demand for water for municipal purposes.

Increases in population, temperature, and income increase demand, whereas increases

in water prices will decrease the quantity demanded. There are a few instances where

this may not be the case. For example, an increase in population density and the related decrease in open space may actually offset each other for municipal water demand (Gibbons 1986).

Municipal water prices do not represent the value of instream water because municipal

water prices include retrieval, storage, and transportation costs (Gibbons 1986). The

marginal value of water depends on water availability as well as demand. For example,

southern California has high water demand as well as limited supply. The value of an

additional unit of water for most consumers is likely to be positive and large. On the

other hand, in water-rich areas, such as western Oregon, the value of additional water

would probably be lower than in southern California.

Producers of municipal water require high-quality input water in their production

process. Without adequate quality and supply of water, benefits will be diminished.

Municipal water suppliers are most concerned with quantity, salinity, and total suspended solids.

If there is not enough water to support a municipality, producers may have to look

elsewhere for further supplies. This is an expensive, as well as controversial issue.

To measure the benefits to producers of adequate water supply or water conservation,

we can estimate the expense of finding and obtaining water elsewhere. The decrease

in marginal costs could be estimated to find the increase in producer surplus from the

savings in production costs from additional local water supplies or conservation.

Salinity is important to producers as well. Salt damages the equipment used in retrieving, treating, and transporting water to households. The effect is an increase in the production costs owing to equipment replacement. The benefits to producers of decreased

salinity accrues as decreased production costs. The source of salinity is often nonpoint

agricultural runoff. It has been estimated that two-thirds of the average salt load in the

upper Colorado River is from natural point and natural nonpoint sources (Spofford and

others 1980). Removing salts is an expensive process. The damage salinity causes to

municipal producers is sometimes far greater than the cost of keeping salt out of rivers

by better agricultural management practices.

Water Uses

Municipal Water Use
9

Total suspended solids are important to municipal water producers. Total suspended

solids are directly related to the treatment procedures that the supplier must use to

ensure safety. Ribaudo and Hellerstein (1992) describe the process of treating source

water for multiple uses by conventional methods such as filtration and disinfection.

Water with low levels of total suspended solids may be treated by filtration, which eliminates the need for other treatments such as sedimentation. Cost savings for municipal

water producers when water has low total suspended solids accrue from the reduced

need for expensive and involved water treatment. Low turbidity levels also simplify the

disinfection process, thus making it less costly.

Agriculture is the major source of sediment in many parts of the country. Soil conservation has a direct link to sediment load. Changes in municipal water production costs

induced by changes in sedimentation are a measure of the welfare effects accrued by

producers. It is simpler to estimate the benefits to producers than to consumers because changes in producer surplus are measured by changes in production costs or

profits. Ribaudo and Hellerstein (1992) state that inputs and outputs of the water production process are generally priced in the market, and it is generally assumed that

the production process is efficient.

Consumers of municipal water supplies are most concerned with four parameters of

water quality: salinity, total suspended solids, water quantity, and clarity. Irrigation of

farmland has been shown to be a factor in salinity in the Colorado River basin, and

elsewhere. High salinity can damage water-using appliances and pipes, increase the

use of detergents, and deteriorate clothing and other textiles (Ribaudo and Hellerstein

1992). The benefits to consumers of decreased salinity come in the form of decreased

costs of replacing appliances, pipes, clothing, and so on.

A common approach in the literature to estimate benefits to consumers from a decrease

in salinity is to estimate physical damage in terms of expected appliance lifetimes, assuming that the household would be willing to pay up to the economic value of those

physical damages to avoid them (d’Arge and Eubanks 1978). The method uses regression equations that relate appliance lifespan to salinity.

Total suspended solids create many of the same effects as salinity; however, total

suspended solids are also related to health and safety of the public. Many outbreaks

of infectious diseases have been traced to contaminants in municipal water supplies.

A low amount of total suspended solids in the public water supply is an important

nonmarket benefit of improved water quality.

Directly estimating household demand or expenditure functions for water quality is generally not possible, as households cannot directly purchase water of varying quality

(Ribaudo and Hellerstein 1992). It is still important to measure the benefits consumers

gain from knowing their water is of high quality and is treated with the best available

technology to ensure safety. To measure the benefits of increased drinking water quality,

we look at people’s willingness to pay for improvements in water quality. The contingent

valuation method can be used to measure willingness to pay for improvements in water

quality. Contingent valuation is a flexible tool as it allows the measurement of benefits of

changes in an environmental good not traded in a formal market (Jordan and Elnagheeb

1993). To examine the benefit of improving residential water quality, a contingent valuation survey would describe the current state of water quality and then create a hypothetical situation of an improvement in water quality. The description should be realistic and

precise enough to give the respondent adequate information on which to base a valuation (Loomis and Walsh 1997).
10

Table 1 summarizes two studies, each using the hedonic property method, concerning

changes in property prices near water bodies given a change in water clarity. The

studies examined the change in property price for each foot of lake frontage given a

1-foot improvement in water clarity. In addition to these studies, Feather (1992) found

changes in the parcel price of land resulting from decreases in water clarity, by using

the hedonic method in Orange County, Florida. The value is unique for each situation,

such as location and current clarity.

Scarcity of water increases its marginal value. However, when water quantity is adequate to satisfy demand, total benefits to consumers increase. Table 2 summarizes

three studies concerning water values to municipal water users given a change in water

quantity. Values were found for a 10-percent reduction in quantity supplied and were

expressed in terms of dollars per acre-foot. The range of values demonstrates the

importance of clearly defining what is being valued. In these cases, water quantity

changes for general municipal use, for lawns, and for indoor domestic use had very

different values.

Table 1—Increase in property value per foot of lake frontage for 1-foot

improvement in water clarity

Valuation

Citation method Location Value

 1998 U.S. dollars

Michael and others 1996 Hedonic China Lake, Maine 28.00

Michael and others 1996 Hedonic Cobbossee Lake, Maine 16.37

Michael and others 1996 Hedonic Long Lake, Maine 17.53

Steinnes 1992 Hedonic Northern Minnesota 2.34

Table 2—Value of water for municipal use

Value per Type of

Citation Valuation method Location acre-foot value

1998

U.S. dollars

Danielson 1977 Value of a 10-percent South Atlantic 41.02 Summer

quantity reduction Gulf

Danielson 1977 Value of a 10-percent South Atlantic 41.02 Winter

quantity reduction Gulf

Young 1973 Value of a 10-percent Lower Colorado 351.08 Summer

quantity reduction

Young 1973 Value of a 10-percent Lower Colorado 54.32 Winter

quantity reduction

Young and Indeterminate Unspecified 359.17 Domestic lawn

Gray 1972 watering

Young and Indeterminate Unspecified 653.21 Indoor domestic

Gray 1972 use
11

Table 3—Value for municipal water use of water quality improvement

Annual household

Citation Location value per 1 mg/La Cost and benefit

improvement

 1998 U.S. dollars

Kleinman and Colorado River, CO 0.0469 Mean cost from previous studies,

Brown 1980 decrease in salinity and total

suspended solids

Ragan and Arkansas River .0533 Benefit from a decrease in salinity

others 1993 watershed, CO from 500 mg/L to 200 mg/L

Ragan and Arkansas River .0365 Benefit from a decrease in salinity

others 1993 watershed, CO from 1,000 mg/L to 200 mg/L

Ragan and Arkansas River .0280 Benefit from a decrease in salinity

others 1 993 watershed, CO from 1,500 mg/L to 200 mg/L

Ragan and Arkansas River .0235 Benefit from a decrease in salinity

others 1993 watershed, CO from 2,000 mg/L to 200 mg/L

Ragan and Arkansas River .0193 Benefit from a decrease in salinity

others 1993 watershed, CO from 3,000 mg/L to 200 mg/L

Ragan and Arkansas River .0177 Benefit from a decrease in salinity

others 1993 watershed, CO from 4,000 mg/L to 200 mg/L

Ragan and Arkansas River .0264 Benefit from a decrease in salinity

others 1993 watershed, CO from 1,000 mg/L to 500 mg/L

Ragan and Arkansas River .0176 Benefit from a decrease in salinity

others 1993 watershed, CO from 2,000 mg/L to 500 mg/L

Ragan and Arkansas River .0152 Benefit from a decrease in salinity

others 1993 watershed, CO from 3,000 mg/L to 500 mg/L

Ragan and Arkansas River .1480 Benefit from a decrease in salinity

others 1993 watershed, CO from 4,000 mg/L to 500 mg/L

a Milligrams per liter.

Table 3 provides information from Kleinman and Brown (1980) and Ragan and others

(1993) concerning total suspended solids and salinity in municipal water uses. Both

studies used a cost savings valuation method to assess the impact of salinity and total

suspended solids on municipal users. Salinity and total suspended solids were combined because they cause similar damages, such as to appliances and clothes. Ragan

and others (1993) outline annual benefits to households for a decrease in salinity to

200 mg/L or 500 mg/L. The study results show that the marginal value for each milligram per liter decrease is less for higher initial salinity.

Water quality affects agricultural uses of water in many ways. Agriculture is also a

source of water quality issues. Runoff and return flows from irrigated fields carry dissolved salts leached from the soil. As river flow is diverted for irrigation, the concentration of total dissolved solids increases, reducing the productivity of the water for

agriculture (Freeman 1979). Irrigation of land is a primary water use by agricultural

Agricultural Water Use
12

producers, and without proper water quality, decreased crop production and disease

may result. There are various ways benefits gained from an improvement in water quality for agricultural purposes can be measured, both to consumers and producers.

To the extent that water quality affects agricultural productivity, it can affect the cost of

production for a variety of goods and services (Freeman 1979). Water quality is a factor

in the production function of an agricultural good. To measure the benefits gained from

a water quality improvement, changes in market variables involved in production of the

good are evaluated. Benefits from a change in water quality are felt in two ways: through

changes in price to consumers, and through changes in the incomes received by owners of inputs used in the production of the good (Freeman 1979).

Salinity, total suspended solids, available water quantity, and water temperature are the

water parameters agricultural producers are most concerned with. The measurement of

benefits to agricultural producers is similar to that of producers of municipal water. The

significant difference is that quantity can change; for municipal water, output quantity

remained constant, so consumer surplus did not change and the cost of production

changed only producer benefits.

Producer benefits are measured through changes in rents received for factors of

production. As an example, say that the producer of organic tomatoes is a single

farmer, a price taker in the output market. If there is an improvement in water quality

and only the farm benefits, then the price of tomatoes is independent of water quality.

Because we already know that the quality of water used as an input in the production

of tomatoes affects the marginal cost of production, we can conclude that an improvement in the water quality will cause the marginal cost curve for the farmer to shift down,

from marginal cost (MC) MC1 to MC2 in figure 4. The price of tomatoes is Px. At MC1,

the farmer produced quantity Q1. With lower costs, the farmer will now produce quantity

Q2 tomatoes. The producer benefit is the entire shaded region of the graph under the

Figure 4—Producer benefit from a shift in marginal cost of production with a

fixed price input.
13

constant price Px. The dark area is the benefit from the reduction of costs to produce

the original amount of tomatoes, Q1. The lighter-shaded area represents the benefits

received from the inframarginal rent on the increase in output. Inframarginal rent is a

term used to describe the producer surplus earned on all units of production but the

last one.

Agricultural consumers are concerned with the same water quality parameters that

concern producers. Assuming a change in production costs will result in a change in

the output price, there will be a change in consumer surplus in addition to the change

in producer surplus. As can be seen in figure 5, when demand DQ is elastic and the

marginal cost of production changes from MC1 to MC2, the total benefit to both consumers and producers is equal to the net change in the sum of the surpluses, or the entire

shaded region. Because most agricultural products are traded in national and international markets, it is rare that a change in water quality in one watershed would have

any effect on the price of most agricultural products. The exception would be locally

grown and consumed specialty crops (Freeman 1979).

Figure 5—Producer and consumer surplus from a shift in marginal cost of

production with elastic demand.

Water quantity is an important concern to agricultural producers. Table 4 summarizes

five studies concerning the benefits to agricultural producers given an increase in

water. The primary method used is to measure the change in production costs given

a 1-acre-foot change in water availability. The study areas were the Pacific Northwest,

Idaho, and Montana. Again, the variation in water value emphasizes that value is a

function of use.

Quantity

Price per unit

MC1 MC2

Q1 Q2

P2

P1
14

Figure 6—Value of damages to agriculture owing to total suspended solids and salinity.

Table 4—Value of water for agriculture

Value per

Citation Valuation method Location acre-foot Crop

1998 U.S. dollars

Aillery and others 1994 Change in production costs Pacific Northwest 34.36

Ayer 1983 Change in production costs Washington 202.94

Ayer and others 1983 Change in production costs Idaho 597.77

Washington State University 1972 Farm crop budget Yakima River basin, WA 20.46 Cotton

Washington State University 1972 Farm crop budget Yakima River basin, WA 171.68 Melons

Washington State University 1972 Farm crop budget Yakima River basin, WA 62.53 Melons

Washington State University 1972 Farm crop budget Yakima River basin, WA 20.71 Potatoes

Washington State University 1972 Farm crop budget Yakima River basin, WA 155.76 Safflower

Washington State University 1972 Farm crop budget Yakima River basin, WA 103.46 Safflower

Duffield and others 1992 Change in production costs Bitterroot, MT 55.71

Duffield and others 1992 Change in production costs Big Hole, MT 26.15

Figure 6 illustrates changes in benefits to agricultural producers given a change in

salinity or total suspended solids, from Kleinman and Brown (1980). They estimate

forgone production minus direct variable costs to agricultural producers relying on

water in the lower mainstem of the Colorado River. Salinity and suspended solids

were combined because of the nature of damages that they cause. There is an

increase in damages as the milligrams of suspended solids per liter increases.

200

150

100

 50

 0

800

850

900

950

1,000

1,050

1,100

1,150

1,200

1,300

1,400

Suspended solids and salinity (milligrams per liter)

Annual value (1998 dollars)
15

The demand for water-based recreation has been increasing as our population expands

and the desire for outdoor recreation grows, particularly near urban areas and in national

parks and other unique sites. Although some rivers heavily used for recreation, and holding other values as well, have been protected by legislation, there are still many watersheds that have been altered by dams and waterway construction, or pollution.

Water-based recreation is affected by all the water quality parameters that we have

discussed. The relative importance of water quality parameters depends on the activity.

Swimming requires higher quality water than boating. For waterskiing, users will prefer

a site where the sediment is low, but sediment may not be as detrimental for activities

such as whitewater rafting, where the main concern is an adequate water supply. Many

famous whitewater rivers such as the Colorado have high sediment loads. To calculate

the benefits of water quality improvements, we must measure the value of water for

the particular recreational activity. There are various ways we can measure the added

benefits people receive when the quality of their experience is improved, or when water

quality is improved. Although several recreation activities may respond to water quality

improvement, the activities are not necessarily homogenous; they may respond

differently to changes in water quality.

Dissolved oxygen, total suspended solids, temperature, and water quantity are important

water quality parameters for fish and, therefore, fishing. Sutherland (1982) states that the

benefits of improved water quality can be defined as net willingness to pay for water

quality improvement. Rafters are most concerned with water quantity. Rafters with

different skill levels often want different water quantities. The amount of total suspended

solids is not as important to rafters as is water quantity; it is also not as important for

rafting as for other uses, such as swimming and fishing. Water quality also is important

for the many recreational activities associated with water shorelines, such as viewing

wildlife and camping. Parameters important to shoreline activities include water clarity,

total suspended solids, and water quantity.

We can use the same nonmarket valuation methods to find the benefits of improved

water quality for various recreationists, such as shoreline recreationists and rafters,

although the results may be quite different. For example, water must have low amounts

of total suspended solids to be classified as swimmable. The value of a decrease of total

suspended solids may be higher for swimming than for rafting or boating. Daubert and

others (1979) conducted a survey to determine the marginal values of different streamflows in the Cache la Poudre River in Colorado for fishing, shoreline recreation, and

whitewater activities. Recreationists were asked what they would be willing to pay to

have more water. Depending on the activity, marginal values could be positive if more

water resulted in higher utility, or negative if more water resulted in decreased utility. The

highest marginal value for fishing, $16 (in 1980 dollars) per acre-foot, was found with low

flows (50 to 90 cubic feet per second); water value dropped to zero as flows reached

450 to 500 cubic feet per second. For shoreline recreation, the maximum marginal value

also occurred at low flows and was $11 per acre-foot, falling to zero at flows of 700 to

750 cubic feet per second. The value for whitewater recreation exhibited constant

marginal returns of $6 per acre-foot at the range of flows in the survey.

Recreation Use
16

Table 5—Value of water quality improvements for recreation (decrease in total suspended solids and salinity)

Citation Valuation method Location Value Water use change

1998 U.S. dollars

Mean increase in benefit per household

Carson and Mitchell 1993 Contingent valuation National 104.29 Nonboatable

to boatable

Carson and Mitchell 1993 Contingent valuation National 79.60 Boatable to

fishable

Carson and Mitchell 1993 Contingent valuation National 88.68 Fishable to

swimmable

Smith and others 1986 Contingent valuation Monongahela River, PA 35.65 Loss of area

Smith and others 1986 Travel cost Monongahela River, PA 6.38 Loss of area

Smith and others 1986 Contingent valuation Monongahela River, PA 38.31 Boatable to

game fishing

Smith and others 1986 Travel cost Monongahela River, PA 12.95 Boatable to

game fishing

Smith and others 1986 Contingent valuation Monongahela River, PA 56.39 Boatable to

swimmable

Smith and others 1986 Travel cost Monongahela River, PA 52.20 Boatable to

swimmable

Mean annual recreation benefits

Activity:

Sutherland 1982 Travel cost 119 counties of ID, OR, and WA 54,630 Swimming

Sutherland 1982 Travel cost 119 counties of ID, OR, and WA 48,957 Camping

Sutherland 1982 Travel cost 119 counties of ID, OR, and WA 98,303 Fishing

Sutherland 1982 Travel cost 119 counties of ID, OR, and WA 66,515 Boating

Table 5 provides information about the increase in benefits to recreationists given an

improvement in water quality. Values were estimated by using contingent valuation and

travel cost methods. Fishing provided the greatest annual benefits in the Pacific Northwest, whereas camping provided the least, reflecting the importance of water quality to

each activity.

Table 6 provides detail from Smith and Desvousges (1986), who estimated recreation

values for changes in water quality. The travel cost method was used to find benefits

per trip for changes in water quality. The sites were primarily in the Midwest, South,

and Southeast. They estimated two values for water quality, one for water suitable for

boating and fishing, and one for water suitable for boating and swimming.

Table 7 summarizes nine studies that use the contingent valuation and travel cost

methods to assess the benefits to recreationists given an increase in water quantity.

Various locations and activities are included in the table to illustrate the variability

across sites and activities. The marginal value depends on the site and the activities

done at each site.
17

Table 6—Recreational benefits measured by the travel cost method for a change

in dissolved oxygen saturation of 1 percent

Value of improvement per trip

Location Boatable Fishable

 1998 U.S. dollars

Arkabutla Lake, MS 4.09 4.59

Lock and Dam 2, Arkansas River navigation system, AR 4.04 4.67

Belton Lake, TX 1.35 1.48

Benbrook Lake, TX .55 1.00

Blakely Mt. Dam, Lake Ouachita, AR .47 .53

Canton Lake, OK .69 .74

Cordell Hull Dam and Reservoir, TN 1.98 2.19

Defray Lake, AR 1.48 1.58

Grapevine Lake, TX .53 .58

Grenada Lake, MS 2.67 3.03

Hords Creek Lake, TX .42 .47

Melvern Lakes, KS .77 .84

Millwood Lake, AR 4.70 5.15

Mississippi River pool 6, MN .05 .05

New Savannah Bluff Lock and Dam, GA 1.82 2.06

Ozark Lake, AR .87 .98

Philpott Lake, VA 2.32 2.61

Proctor Lake, TX .11 .13

Sam Rayburn Dam and Reservoir, TX 1.29 1.42

Sardis Lake, MS 1.27 1.42

Whitney Lake, TX .95 1.06

Source: Smith and Desvousges 1986.

Because there are 17 different value estimates for instream flow values in table 7, it

is possible to perform a systematic, quantitative analysis for relations by using metaanalysis. Meta-analysis is a commonly used quantitative reversion technique applied

to evaluate results of past studies for patterns or consistency of findings. The studies

summarized in table 7 were examined by using meta-analysis to determine what, if any,

statistical relation might exist between the value per acre-foot increase, and independent variables that include waterflow, recreational activity, and valuation method used.

Results of the regression are outlined in table 8. The functional linear form between the

variables resulted in the best t-statistics, and highest explanatory power at 59 percent.

Water Quantity

and Recreation

Meta-Analysis
18

Table 7— Value of water for recreation uses

 Additional

 Marginal value feet per

Citation method Valuation method Location per acre-foot second Type of activity

1998 U.S. dollars

Daubert and Young 1981 Contingent valuation Poudre River, CO 14.50 100 Fishing

Daubert and Young 1981 Contingent valuation Poudre River, CO 13.44 100 Rafting

Daubert and Young 1981 Contingent valuation Poudre River, CO 14.50 100 Shoreline

Walsh and others 1980 Contingent valuation West Slope Rivers, CO 6.94 1,400 Kayaking

Walsh and others 1980 Contingent valuation West Slope Rivers, CO 4.50 2,800 Rafting

Walsh and others 1980 Contingent valuation West Slope Rivers, CO 24.46 1,120 Fishing

Ward 1987 Travel cost Rio Chama, NM 40.32 1,000 Rafting and fishing

Harpman 1990 Contingent valuation Taylor River, CO 3.10 40 Fishing

Duffield and others 1992 Contingent valuation Big Hole, MT 34.12 100 Fishing

Duffield and others 1992 Contingent valuation Bitterroot, MT 13.44 100 Fishing and shoreline

Johnson and Adams 1988 Contingent valuation John Day River, OR 3.10 204 Fishing

Loomis and Creel 1992 Travel cost San Joaquin, CA 90.00 2,000 Fishing and other

Loomis and Creel 1992 Travel cost Stanislaus, CA 16.54 300 Fishing and other

Loomis and Cooper 1990 Travel cost North Fork Feather, CA 91.63 20 Fishing

Loomis and Cooper 1990 Travel cost North Fork Feather, CA 71.29 100 Fishing

Loomis and Cooper 1990 Travel cost North Fork Feather, CA 57.44 200 Fishing

Loomis and Feldman 1995 Contingent valuation Snake River, ID 76.00 235 Viewing of falls

Table 8—Linear and double log meta-analysis regression results for marginal

benefits from an increase in streamflowa

 Linear:

 CFSb

 Dependent Log-log:

Form variable Constant Valmethod Fish Boat LNCFSc F-stat R2

Linear VAFd 40.88 50.42 -26.53 -35.84 0 .004 4.37 .59

(2.82)e (3.69) (-1.56) (-1.99) (.48)

Log-Log LNVAFf 3.13 1.76 -0.84 -1.04 .02 3.30 .52

(2.90) (3.28) (-1.26) (-1.48) (.09)

a Number of observations = 17 with 12 degrees of freedom. Studies are outlined in table 7.

b CFS = water flow in cubic feet per second.

c LNCFS = log of CFS.

d VAF = value per acre-foot increase.

e Numbers in parentheses are t statistics.

f LNVAF = log of VAF.
19

The estimation resulted in the following equation:

VAF = ß0 + ß1valmethod - ß2fish - ß3boat + ß4CFS

where VAF is the value per acre-foot increase in 1998 dollars,

valmethod is a dummy variable for the valuation method used where 0 = contingent

 valuation and 1 = travel cost,

fish is a dummy variable for fishing where fishing = 1 and not fishing = 0,

boat is a dummy variable for boating where boating = 1 and not boating = 0, and

CFS is waterflow in cubic feet per second.

In the log-log equation, LNVAF is the log of the value per acre-foot increase in flow, and

LNCFS is the log of waterflow in cubic feet per second.

The overall linear regression does a good job explaining nearly 60 percent of the variation

in values for instream flow. The coefficient on valmethod indicates that if the travel cost

method was used, then the marginal value per acre-foot increases by $50.42, as

compared to a contingent valuation method study. The t-statistic is significant at the

1-percent level. If the activity performed is boating, the marginal value per acre-foot

decreases by $35.84. The t-statistic for this variable is significant at the 5-percent

level. The variable CFS has a low t-statistic, indicating waterflow is not significant in

the model. This suggests that the recreational value of instream flow appears not to

be related to the absolute flow level. It may be that relative flow concepts, such as

percentage bankfull elevation2, used in the Walsh and others (1980) analysis is a more

meaningful concept when comparing waterflows across rivers and studies. As additional

instream flow studies become available, this analysis could be updated to improve the

meta-analysis. An improved meta-analysis equation could be used to provide a simple

benefit-transfer for providing rough estimates of the value of instream flow on rivers without

existing studies.

Industrial water use in the United States accounts for approximately 43 percent of withdrawals and 9 percent of consumption (U.S. Water Resources Council 1978). Industrial

water use is water used as an input in a production process, such as cooling, condensation, washing, and moving materials (Gibbons 1986). Water may also be incorporated

into products.

Industrial intake water must meet various water quality standards. Industrial users of

water are concerned with total suspended solids, salinity, and quantity of water available. Depending on the use, quality standards differ in stringency. If the water is used

for human consumption or for boiler feed, quality requirements are the most stringent.

2 Bankfull elevation is the elevation of the depositional flat,

immediately adjacent to the channel (Leopold 1994). The

streamflow most effective in producing and carrying sediment

is the flow at bankfull elevation (Verry 2000). Bankfull is that

portion of the channelway usually defined by a topographic

break, where water would completely fill the channel to the

level of the adjacent floodplain. It represents a common reference

point for measuring flows (personal communication, April 2002,

Dr. Gordon Grant, research hydrologist, USDA Forest Service,

Pacific Northwest Research Station, Forestry Sciences Lab,

3200 SW Jefferson Way, Corvallis, OR 97331).

Industrial Water Use
20

High salinity or suspended solids could be detrimental to equipment (Gibbons 1986).

The quantity of water available is also important. Many companies have their own wells

for general process water supply.

Like some agricultural and municipal water uses, industrial water use can result in

water quality degradation. The cooling process carries away waste heat, raising water

temperature if discharged back to the water source. Evaporative losses may increase

the concentration of salts. Chemical and petroleum refining may introduce organic

chemicals and solvents into the effluent (Kleinman and Brown 1980).

Changes in marginal costs of production must be estimated to calculate the change

in benefits to industrial producers from improvements in water quality. In most cases,

if total suspended solids or salinity decreases in the input water, there is a decrease

in production costs, for example, by eliminating certain treatments or in longer equipment life. These changes in benefits are measured by deriving a new marginal cost

curve given the decrease in production costs. The increase in producer surplus is then

measured for production of the same amount of the good, given that the price to the

consumer remains constant and only the producers benefit. This is the same method

used for agricultural producers given that the price of the good remains constant.

Assuming the price of a good changes with a change in marginal cost of production,

we would expect to see an increase in consumer benefits given improvements in water

quality. The methods for measuring the increase in consumer surplus are the same as

described for agricultural products.

Table 9 summarizes four studies concerning the values of water for industrial uses.

Water value was calculated in most of the studies by examining changes in production

costs for a particular industry. The values are highly variable between industries. For

example, the value per acre-foot of water for the chemicals industry is $99, while the

low estimate for the meat packing industry is $637 per acre-foot. The meat packing

industry may require more water of higher quality in their production processes than

does the chemical industry.

Heintz and others (1976) and Unger (1978) provide estimates of annual damages that

industries face because of poor water quality owing to salinity and suspended solids.

Heintz and others (1976) estimated total annual damages at $968 million, and Unger

(1978) at $1.9 billion, in 1998 dollars. There is little information on benefits for industrial

water use owing to the uniqueness of industrial uses, and differences in damage estimates are due to variations in industry uses.

Hydropower has been a source of energy for many years, for activities such as the use

of water wheels to rotate grindstones for milling wheat, corn, and other grains. In 1980,

the United States relied on hydropower from dams for about 12.1 percent of the power

consumed in the country. Hydropower is an important method of obtaining energy and

has many advantages. One unit of water generates hydropower cumulatively by passing

through turbines of many dams along the descent of a river (Gibbons 1986). Hydropower

produces less pollution than the extraction and burning of fossil fuels such as coal or

natural gas.

Hydropower does have disadvantages. Depending on their construction, dams can

eventually silt in or wear out. Dams cause the inundation of vast amounts of land,

destruction of fish and wildlife habitat, and the loss of whitewater recreational

Hydropower Water Uses
21

opportunities (Gibbons 1986). Dams also may cause changes in water temperature.

Decreased movement of sediment through the system contributes to loss of habitat

and recreational opportunities downstream. These effects are cumulative in a system

of dams.

Parameters most important for hydropower production are water quantity and salinity.

Salinity affects hydropower production in some of the same ways it affects industrial

production. If salinity is too high, penstocks and turbines may deteriorate more quickly.

Measurement of benefit from improvements in salinity levels is estimated by determining

the increase in equipment lifespans and savings in replacement costs. Water quantity

is important in hydropower production. Without an adequate water supply, efficiency is

lowered. When valuing water for hydropower, it is important to note that the productivity

for hydropower is constant. Each acre-foot of water dropped over a given head (vertical

feet) makes the same amount of electricity, so the marginal and average productivities

of water in this use are equal. On a specific river, the amount of electricity produced per

unit of water is a function of both the average net head on the river and the conversion

efficiency of the particular hydropower facility (specifically, the efficiency of the conversion of the energy of falling water into electrical energy) (Gibbons 1986). This relation is

fairly standard and can be expressed as 0.87 kilowatt per acre-foot of head (Whittlesey

and others 1981).

As water quantity increases in a river, we would expect to see an increase in hydropower production and an increase in revenues. The increase in revenue can be calculated by multiplying the acre-feet of water by 0.87 times the value of a kilowatt-hour.

However, there must be a demand for the power when the water is available. At high

spring flows, electricity demand for heating and cooling is low, so a lower price may

be received.

Table 9—Values of water for industrial use

Valuation Value per Type of

Citation method acre-foot industry

1998 U.S. dollars

Young and Gray 1972 Indeterminate 99.77 Chemical industry

Young and Gray 1972 Indeterminate 125.27 Paper manufacturing

Young and Gray 1972 Indeterminate 31.04 Minerals industry

Russell 1970 Change in 146.33 Beet sugar processing

production costs

Kollar and others 1976 Change in 259.40 Cotton textile finishing

production costs

Kane and Ostantowski Change in 637.42 Low estimate,meat

1980 production costs packing industry

Kane and Ostantowski Change in 889.07 High estimate, meat

1980 production costs packing industry
22

Consumers of hydropower obtain benefits when water quantity increases. With an increase in waterflow, there is a potential increase in kilowatt-hours produced. This results

in a lower marginal cost curve to producers because they are now able to provide more

electricity. As demand for electricity is usually inelastic, consumers of electricity obtain

benefits from water quantity increases in the form of decreased prices.

Table 10 summarizes information from three studies concerning the values of water for

hydropower use. The hydropower industry relies on a large supply of water to provide

energy to their customers. The cost savings of hydropower compared to other means of

producing electricity were found for different parts of the country by Brown (2000). Alternate costs of firm and peak levels of production were found for other means of providing

electricity for certain parts of the country and then compared to the same production

level from hydropower by Gibbons (1986). Whittlesey and others (1981) evaluated the

opportunity cost of forgone power production owing to agricultural diversions.

Nonmarket values for water include onsite use value and nonuser benefits. Nonuser

benefits of water include benefits people obtain without making direct use of water, such

as ecological value, preservation benefits, and option or bequest values. These benefits

are hard to measure because they are often not linked to observable behavior. Parameters necessary in defining water quality for nonuse benefits may include clarity, quantity, total suspended solids, salinity, dissolved oxygen, and temperature.

Many people receive value from high water clarity because they own or visit land near

water bodies and clarity affects aesthetics. Water quality must be sustainable to ensure

the environmental quality of particular ecosystems, as high levels of suspended solids

or salinity can be harmful to aquatic ecosystems. Spawning areas, food sources, and

habitats can be harmed, and there can be direct damage to fish, crustaceans, and

other aquatic wildlife (Clark and others 1985). Many upstream activities can cause

small changes in water temperature, and results can potentially be devastating. Many

aquatic organisms have strict temperature requirements and thus are susceptible to

fluctuations in temperature. Dissolved oxygen is extremely important for the survival of

many species. If the amount of dissolved oxygen is disrupted, there can be a serious

alteration of the aquatic ecosystem. However, some systems are defined as having good

water quality even if their dissolved oxygen concentrations are low, such as wetlands;

different water bodies have different uses, and acceptable water quality will depend on

these uses. Alterations of the parameters can be detrimental to fish and wildlife in many

ecosystems.

Water quantity is an important parameter for many habitats. It has been shown that

the marginal value of instream flow for fish habitat gradually drops as flows reach a

maximum (Brown 1991). Low streamflow can cause concentrations of many pollutants

to increase, and cause an increase in water temperature.

Lakefront properties can be viewed as heterogeneous goods; they have many different

characteristics and are differentiated from each other by the quality and quantity of

these characteristics (Michael and others 1996). When consumers purchase differentiated goods, they are purchasing the characteristics that make up that good (Lancaster

1966). If the quality of any of the characteristics of the goods changes, we would expect

the price of the good to change. If the quality of water surrounding lakefront property

improves, we expect the price of the property to increase because water quality is a

characteristic of the property. The hedonic valuation method allows the measurement

of benefits of water quality through the price differences of housing.

Nonmarket and

Nonuse Values
23

Table 10—Values of water for hydropower use

Value per

Citation Valuation method Location acre-foot

1998

U.S. dollars

Brown 1999 Cost savings Colorado River 17.00

Brown 1999 Cost savings California 10.68

Brown 1999 Cost savings Pacific Northwest 8.59

Gibbons 1986 Alternate cost of 18.52 mills Columbia River, from 34.00

per kilowatt-houra Grand Coulee Dam

to sea level

Gibbons 1986 Alternate cost of 44.01 mills Columbia River, from 88.00

per kilowatt-hourb Grand Coulee Dam

to sea level

Gibbons 1986 Alternate cost of 18.52 mills Snake River, from 64.00

per kilowatt-hour American Falls

to sea level

Gibbons 1986 Alternate cost of 44.01 mills Snake River, from 160.00

per kilowatt-hour American Falls

to sea level

Gibbons 1986 Alternate cost of 18.52 mills Tennessee River 16.00

per kilowatt-hour

Gibbons 1986 Alternate cost of 44.01 mills Tennessee River 36.00

per kilowatt-hour

Gibbons 1986 Alternate cost of 18.52 mills Colorado River, 46.00

per kilowatt-hour from Shoshone

to the mouth

Gibbons 1986 Alternate cost of 44.01 mills Colorado River, 114.00

per kilowatt-hour from Shoshone

to the mouth

Whittlesey and Opportunity cost of forgone Southeast ID 125.00

others 1981 power generation

Whittlesey and Opportunity cost of forgone Southwest ID 80.00

others 1981 power generation

Whittlesey and Opportunity cost of forgone Lower Columbia River 13.30

others 1981 power generation

Whittlesey and Opportunity cost of forgone Columbia River basin 70.00

others 1981 power generation

a The average production expense for a coal-fired steam-electric plant in 1980.

b The average production expense for a gas-turbine electric plant in 1980.
24

Property attributes are also an important nonmarket benefit. Although property owners

may not consume the water in a lake or stream, water adjacent to property has aesthetic value and attracts wildlife, which residents enjoy. Property owners receive economic value from water clarity. In a study of lakefront property in Maine by Michael and

others (1996), house price per foot of lake frontage was modeled as a function of water

clarity at the time the property was purchased, along with other factors such as square

footage and number of bedrooms. The study found that estimated increases in selling

price of the average lakefront property owing to a 1-meter improvement in water clarity

ranged from $34 to $81 per foot of lake frontage, depending on the lake valued. Estimated decreases in the selling price of the average lakefront property owing to a 1-meter

reduction in water clarity ranged from $65 to $141 per foot of lake frontage. Estimates

of the aggregate property price increase around an entire lake owing to a 1-meter water

clarity improvement ranged from $6,528,000 to $9,365,900, whereas estimates of the

aggregate price decrease around an entire lake owing to a 1-meter reduction in water

clarity were between $12,480,000 and $16,080,700.

Loomis and others (2000) used contingent valuation to estimate values per acre-foot of

water on the Platte River in Colorado at $771. Douglas and Taylor (1999) used contingent valuation to assess several scenarios on the Trinity River in California. They estimated values per acre-foot of water that ranged from $536 to $957. Table 11 illustrates

the value of salmon given changes in water quality. It is interesting to note that as the

number of salmon assumed to exist in each study goes down, the marginal value per

salmon increases, reflecting the increased scarcity.

In table 12, values for water quality for nonusers are outlined from three studies. In each

study, survey respondents are valuing improvements in water quality related to salinity,

suspended solids, and water quantity.

Table 11—Nonmarket nonuse values of additional salmon owing to an increase

in water quality

Number of

Citation Valuation method Location Value salmon

1998

U.S. dollars

Loomis 1999 Contingent valuation Pacific Northwest 1,400 1,000,000

and California

Loomis 1999 Contingent valuation Pacific Northwest 10,712 250,000

and California

Olsen and others Contingent valuation Pacific Northwest 203 2,500,000

1991 and California

Loomis 1996 Contingent valuation Pacific Northwest 3,325 300,000

Hanemann and Contingent valuation California 232,356 14,900

others 1991
25

Table 12—Nonmarket values of water quality (salinity and total suspended

solids) and quantity

Valuation Value per

Citation method Location household Notes

1998 U.S. dollars

Greenley and Contingent South Platte 95.00 Existence and bequest

others 1981 valuation River basin values of nonrecreationists

from Fort Collins

Greenley and Contingent South Platte 99.00 Existence and bequest

others 1981 valuation River basin values of nonrecreationists

from Denver Metro and the

South Platte basin

Loomis 1987 Contingent Mono Lake 131.00 Utility bill increase for first

valuation level of improvement in

lake level, visibility, and

bird survival and diversity

Heintz and Contingent Fraser River 656.00 Preservation value of salmon

others 1976 valuation valley

Conclusion Across the Nation, there are significant challenges to policymakers and decisionmakers concerning the allocation of high-quality water to the many uses and users.

The challenge is to manage federal lands to provide abundant, clean, high-quality

water to sustain a burgeoning population, an agricultural industry, historical salmon

runs and populations of other threatened species, and recreational opportunities

(USDA Forest Service 2000).

Table 13 is a summary of water values by use and parameter for the studies cited in

this paper. Although this is a useful summary of the information we have presented, the

variation in value by use outlined in previous tables must be kept in mind. Nonmarket

values are not summarized in table 13, as the type of meta-analysis outlined in table 8

is a better way to assess the similarity of nonmarket valuation studies.

The application of water values in particular uses can help in forest planning processes,

as well as in policy decisions concerning our national forests. National forest land is

the largest single source of water in the United States (USDA Forest Service 2000). The

USDA Forest Service can provide information to policymakers, managers, and citizens,

and improve their ability to develop options, anticipate consequences and implications,

and formulate responsive, informed programs. An understanding of water values can

provide information on issues concerning Federal Energy Regulatory Commission

(FERC) relicensing, instream flow protection for threatened and endangered species,

and water policy responses in the face of climate change.

From the 1940s to the 1960s, 325 hydroelectric projects were licensed and built on

U.S. national forests. These facilities have provided power, as well as many recreational

opportunities. They also have resulted in significant adverse effects on national forest
26

resources. Within the next decade, more than half of these projects will come up for

relicensing. This relicensing process presents the opportunity for the USDA Forest

Service to influence how these projects will operate for the next 30 to 50 years (USDA

Forest Service 2000).

With the application of water values to particular uses, particularly many recreational

and nonuse values, water values for hydropower can be compared to water values for

minimum instream flow and recreation and habitat enhancement. An economic analysis

can reflect public values for both hydropower and other concerns in FERC relicensing.

Gibbons (1986) provides values for instream water for various purposes. By reducing

power production and allowing more waterflow for recreation, we can enhance recreational experiences while still allowing for power production (Loomis and Feldman 1995).

Water values for various uses also can be used to assess the tradeoffs between irrigation and other uses. Water rights, however, were established over a century ago by

using the prior appropriation system. In addition, environmental laws such as the 1977

Clean Water Act and the 1973 Endangered Species Act establish standards for water

Table 13—Summary of mean water values by use and parameter in adjusted 1998 dollars

Water parameter

Salinity and total Dissolved

Water use Clarity Quantity suspended solids Temperature oxygen levels

Municipal 16.06a 249.97b 0.0656 c Not applicable (NA) NA

(n=4) d (n=6) (n=10)

Agriculture NA 131.96e 52.04 Negative effect NA

(n=11) (n=21)

Recreation Positive 33.8 f 52.72 g Negative or 1.54 h

effect (n=17) (per household; n=9) positive effect (boat and fish, n=21)

67,100.00 depending 1.74 h

(total value; n=4) on activity (boat and swim, n=21)

Industrial NA 313.0 i 1.43 billion Negative effect NA

(n=7) annual damages

(n=2)

Hydropower NA 58.84 j Negative effect NA NA

(n=15)

a Value per foot of lake frontage for 1-foot improvement in water clarity; data from table 1.

b Value per acre-foot for municipal use; data from table 2.

c Value of water quality for municipal use; data from table 3.

d n = number of studies assessed.

e Value per acre-foot for agriculture; data from table 4.

f

 Value per acre-foot for recreation; data from table 7.

g Value of water quality for recreation use; data from table 5.

h Value per recreational trip for an improvement in dissolved oxygen; data from table 6.

i Value per acre-foot for industrial use; data from table 9.

j

 Value per acre-foot for hydropower; data from table 10.
27

quality. Water quality and quantity are still issues. The Forest Service needs to actively

participate in the processes that establish rights and laws for water quality and water

rights to secure instream flows sufficient to sustain species populations and recreational

opportunities (USDA Forest Service 2000).

The contingent valuation method can provide us with information concerning the value of

instream flow for nonmarket purposes. The values can be compared in different settings

to assess management options for forest planners, as well as for policymakers to help

with assessing multiple uses of a limited resource. As an example, Daubert and Young

(1981) used the contingent valuation method to find values for fishing per acre-foot of

water in the Poudre River in Colorado. With this information, we could then find agricultural water use values in the river basin, and analyze management strategies that balance water uses with marginal values for both recreationists and farmers.

As there are many hydrologic changes that may accompany global climate change,

climate change is another variable that may have many adverse effects on the world’s

water supply, leading to difficulties in meeting competing water use requirements. Climate change may affect water supply and quality for drinking, irrigation, recreational,

commercial, and industrial use, and may affect instream flows that support aquatic

ecosystems, recreation, and hydropower. These conditions will present challenges to

water managers who must balance increasingly variable water supplies with seasonal

water demands that do not coincide with one another.

A further challenge is the growing public and legal demand for water for environmental

purposes. The value of leaving water instream to protect endangered species and

support habitat is increasing throughout the Nation. There are various policy options

that may help meet the demands of water users, including modifying those demands.

With data on water values, these policies can look at higher valued uses to help with

decisionmaking.

Water price reform may be one strategy used to decrease the inefficient use of water for

irrigation and alleviate some of the pressures of excess demand that arise from water

shortages. Moss and DeBodisco (1998) state that irrigation water is underpriced, and

this is a significant stumbling block to more efficient use. According to Gibbons (1986),

a 10-percent reduction in consumptive use by agriculture represents a 50-percent increase in water availability for urban or environmental purposes. Reductions in agricultural use can be achieved in several ways, but most likely through water pricing reforms

and incentives for water transfers, either on an individual basis or through formal water

markets.

Water banks are public or private institutions that act as water brokers or clearinghouses to match buyers and sellers of water. They facilitate the rapid movement of

water from low- to high-value uses. California has had success in coping with drought

by developing and implementing a state-run water bank. Owing to continuation of a

severe drought, cities and farmers with permanent crops, such as orchards, faced substantial water supply shortfalls. In 1991, Governor Wilson created the California Water

Bank. The water bank was designed to meet four essential water needs: municipal and

industrial uses, agricultural uses, protection of fish and wildlife, and carryover storage

(U.S. Office of Technology Assessment 1993). At the time of establishment, the state

of California bought water at $125 per acre-foot, and sold it for $175 per acre-foot, and

the buyer paid delivery costs. Of the $50 spread between purchase and sale price, $45

covered losses such as water lost in transit from the source to the buyer. The remaining

$5 covered Water Bank administration costs. In part, the purchase price was arrived at
28

by estimating forgone income per acre through an assessment of consumptive water

use for crops. This is an example of the way water values can be used to respond to

changes in water supply.

Outright purchases of senior water rights for drought protection may impose unwanted

costs on the economies of local communities relying on irrigated agriculture, and may

not be the most cost-effective solution. Agricultural water rights holders can retain their

water rights and have the option to transfer their rights for other uses by instituting water

supply option contracts. The exercise of the option transfers water to other uses as

needed, while preserving water for agriculture during normal supply years (Michelsen

and Young 1993).

Providing cold, clear water of high quality for aquatic organisms and human use is a

focus of water management on national forests. With information about water and water

quality values for various uses and water quality parameters, we can estimate the marginal values for water with a given change in a water quality parameter. The values reported here can be used to help with reevaluating many policy and management

regimes in the face of water scarcity and pollution issues concerning our Nation’s

water resources.

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Metric Equivalents When you know: Multiply by: To find:

Acres 0.405 Hectares

Feet .305 Meters

Cubic feet .0283 Cubic meters

Acre-feet 1,233.5 Cubic meters

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