EPA

United States Office of Water (4602)

Environmental Protection

EPA 230-B-95-003

Office of Policy, Planning October 1995

Agency and Evaluation (2127)

A Framework for Measuring

the Economic Benefits of

Ground Water
EPA 230-B-95-003

A FRAMEWORK FOR MEASURING THE ECONOMIC

BENEFITS OF GROUND WATER*

October 1995

This report is the product of the EPA Interoffice Groundwater Valuation Workgroup that included two economists *

outside the Agency. Workgroup members are identified on the following page.
Workgroup Members

Kevin J. Boyle, Department of Resource Economics & Policy, University of Maine

John C. Bergstrom, Department of Agricultural & Applied Economics, University of Georgia

Charles Job, Office of Groundwater and Drinking Water

Mary Jo Kealy, Office of Policy Planning and Evaluation

Ron Bergman, Office of Groundwater and Drinking Water

Rodges Ankrah, Office of Policy Analysis

Ghulam Ali, Office of Pesticides Programs

Jihad Alsadek, Office of Pesticides Programs

Gary Ballard, Office of Solid Waste

Vivian Daub, Office of Water

Jacolyn Dziuban, Office of Radiation Programs

Dick Howes, Office of Emergency and Remedial Response

Susan Schulze, Water Management Division (Region II)
Table of Contents

Introduction ................................................... 1

Framework for Valuing Ground Water ............................... 3

Defining Ground Water Values ............................... 4

Ground Water Functions .................................... 8

Ground Water Services .................................... 18

Effects of Changes in Ground Water Services ................... 19

Measuring Economic Values ................................ 20

Aggregation Issues ....................................... 23

Uncertainty in Ground Water Valuation ........................ 24

Intergenerational Issues .................................... 25

Previous Ground Water Valuation Studies ........................... 27

Ground Water Valuation and Regulatory Impact Analyses ............... 37

Draft Class V Injection Well Regulatory Impact Analysis .......... 37

Draft RIA for Final Rulemaking on Corrective Action for Solid Waste 

 Management Units ............................... 39

Summing Up ............................................ 41

A Structure for Considering the Value of Ground Water ................. 43

Protocol Components ...................................... 44

Concluding Comments .......................................... 53

References Cited ............................................... 55
List of Tables

Table 1. FUNCTION: STORAGE OF WATER RESERVE (STOCK) ....... 9

Table 2. FUNCTION: DISCHARGE TO STREAMS/LAKES/WETLANDS. . 13

Table 3. Ground Water Conditions in Study Areas ..................... 31

Table 4. Information Presented on Ground Water Commodity

 (Change in Services) ..................................... 33

Table 5. Changes in Ground Water Services - Stock Function ............. 48

Table 6. Changes in Ground Water Services - Discharge Function ......... 49

Table 7a. Available Data for Valuing Changes in Ground Water Services - 

 Stock Function ......................................... 51

Table 7b. Needed Data for Valuing Changes in Ground Water Services - 

 Stock Function ......................................... 52

Table 8. Other Valuation Considerations for Changes in Ground Water

 Services - Stock Function .................................. 53

List of Figures

Figure 1 ....................................................... 5
1

 Although we limit our application of the valuation framework in this report to RIA's, the framework can also be 1

applied to other ground water policies and programs.

I. INTRODUCTION

The primary goal of this report is to develop a framework for valuing ground water that

is applicable to all offices within U.S. EPA (EPA hereafter) that consider the value of ground

water resources when conducting Regulatory Impact Analyses (RIAs). The precedent for this 1

effort was set with the development of "A Guide for Cost-Effectiveness and Cost-Benefit

Analysis of State and Local Ground Water Protection Programs" by EPA's Office of Water

(United States Environmental Protection Agency, 1993). The guide provides a concise

discussion of the processes for accomplishing these types of analyses, but does not provide

specificity regarding the estimation of ground water values. It is the intent of this report to begin

to develop the framework for a comparable guide for assessing the economic value of ground

water. We use the term value in a generic sense such that the values associated with reductions

in ground water quantity or quality may be considered losses and, conversely, increases are

deemed benefits.

The objectives of this report are to:

1. Provide a conceptual framework for identifying and measuring the economic value of

ground water.

2. Consider the extent to which the benefits of ground water protection, as suggested by the

valuation framework, have been accounted for in previous RIAs; and

3. Provide guidelines for utilizing the valuation framework to consistently value ground

water across EPA offices and policy issues within offices.
2

The next section of this report describes the conceptual framework for identifying and measuring

the economic value of ground water. The valuation framework links changes in physical

characteristics of ground water to uses (services) provided by ground water and the economic

effects of changes in ground water services. Almost all EPA program offices, in the course of

their respective missions, develop policies or programs that can affect the condition of ground

water resources. For example, issues relating to pesticides and resulting decisions by the Office

of Pesticides can have implications for ground water quality in areas where pesticides are

produced or in areas where the pesticides are applied. Similarly, actions by the Office of Solid

Waste related to superfund sites can have implications for ground water quality. Having a

consistent blue print for ground water valuation can serve to avoid duplication of effort, and can

help to ensure consistency in ground water value assessments within and across offices.

Before moving to a discussion of how the ground water valuation framework applies to

RIAs, we discuss studies that have investigated the value of ground water. We do this because

RIAs are often dependent on data available in the literature and discussing existing studies helps

to amplify issues raised in regard to the conceptual foundation for valuing ground water. The

discussion of existing ground water valuation studies is presented in Section III and we focus on

the commodity definitions as this issue is unique to ground water applications.

It was decided as part of the development of this report that the illustrative applications

would focus on two recent RIAs. This was done because the field of environmental valuation is

evolving rapidly and RIAs conducted five to ten years ago had limited access to much of the

ground water valuation data currently available. It was also believed that the selected RIAs

present the most comprehensive evaluations of ground water conducted by EPA for RIAs. The
3

RIAs examined are the "Class V Injection Well Regulatory Impact Analysis and Regulatory

Flexibility Analysis" by the Office of Water (U.S. EPA, 1993) and "Draft Regulatory Impact

Analysis for the Final Rulemaking on Corrective Action for Solid Waste Management Units" by

the Office of Solid Waste (Cadmus Group, 1993).

In the final section, Section V, we suggest initial guidelines for developing a common

approach for valuing ground water across offices. These guidelines should be equally

appropriate for the design of original studies as well as selecting available studies for

transferring estimates to new applications in current RIAs. 

II. FRAMEWORK FOR VALUING GROUND WATER

Any assessment of the effect of EPA programs or policies on the economic value of

groundwater begins with the investigator making a number of decisions that define the

conceptual and empirical domain of the investigation. These decisions are the direct

consequence of explicit and implicit questions posed by the investigator(s) and to a large extent

determine the outcome of the investigation. A fundamental issue is the definition of the change

in the condition of a resource and the ensuing changes in services generated by the resource, i.e.,

commodity definition. This begins with an understanding of whether the change has occurred or

is proposed. Given ex post or ex ante standing, the next step is to develop a technical definition

of the reference condition of the resource and identify whether the increment of change is an

enhancement or diminishment of the quantity and quality of the resource. For either

enhancement of, or preventing harm to, the expected condition of the resource must be defined. 

Differences between the reference condition and expected condition define the change in the

quantity and quality of a resource to be evaluated. Consideration should also be given as to
4

whether the mechanism(s) employed to accomplish the change can achieve the proposed

resource condition with certainty. It is also necessary to know the geographical extent of the

changes to address the issue of whose values should count in the computation of aggregate

benefits or costs. This information collectively constitutes the formal commodity definition for

a resource being valued. These questions must be asked for original investigations of value as

well for transfers of value estimates to unstudied sites.

After the commodity definition is established, it is necessary to map changes in the

resource condition into changes in the provision of services from which humans derive value. 

Accomplishing this step can be difficult regardless of whether an original investigation or

transfer exercise is being performed. Benefit transfer practitioners have an added complication

in that they must interpret value estimates at study sites and assess their transferability,

conceptually and statistically, to the policy site. In turn, the increment of change being

evaluated at the policy site must be carefully defined, not only for relevance to the current policy

issue, but also to accomplish the transfer exercise itself. 

Defining Ground Water Values

Valuing ground water requires a clear definition of the ground water "commodity" to be

valued. Figure 1 summarizes the technical data required to define a ground water commodity. 

The first step is monitoring (Box 1) to assess the current or baseline aquifer condition in quantity

and quality dimensions (Box 2). The next step is to assess how the current quantity and quality

of ground water will change "with" and "without" the proposed regulation (Boxes 3 and 4). 

These factors include extraction rates, natural recharge and discharge, natural contamination
5

1

AQUIFER MONITORING

2

CURRENT QUANTITY AND QUALITY

(e.g., salt infiltration) and human-induced contamination (e.g., pesticide contamination,

industrial chemical contamination), and public policies regarding the use and protection of

ground water. The results of the assessments provide estimates of the reference (without policy)

water quantity (X ) and quality (Q ), and the subsequent (with policy) water quantity (X ) and 0 0 1

quality (Q ) (Boxes 5 and 6). Given estimates of the reference and subsequent ground water 1

conditions, we define the change in water quantity and quality (X - X , Q - Q ) (Box 7). The o 1 0 1

steps and linkages illustrated by Boxes 1-7 primarily involve the work of hydrologists,

geologists, engineers, ecologists, soil scientists, and other physical and biological scientists. 

Investigations of ground water conditions by these specialists must be sufficient to identify

changes in ground water services linked to the prescribed policy in a manner that facilitates the

estimation of economic values. Formally modeling the steps illustrated by Boxes 1-7 represents

one of the greatest challenges that needs to be addressed to estimate economic values of ground

water protection.

FIGURE 1. The Production of Benefits From Improved Ground Water Quality or

 Quantity

 

 
6

3

ASSESSMENT OF FACTORS

AFFECTING QUANTITY AND

QUALITY "WITHOUT POLICY"

4

ASSESSMENT OF FACTORS

AFFECTING QUANTITY AND

QUALITY "WITH POLICY"

5

REFERENCE WATER QUANTITY (X)

0

AND QUALITY (Q )

0

6

SUBSEQUENT WATER QUANTITY (X)

1

AND QUALITY (Q )

1

7

CHANGE IN WATER QUANTITY AND QUALITY 

(X - X , Q - Q )

o 1 o 1

8

CHANGE IN GROUNDWATER SERVICES

S = f(X , Q S ) TO S = f(X , Q S )

o o o o 1 1 1 o

S S

9

ECONOMIC VALUE (BENEFITS)

V=g( S SS

), WHERE S=S -S o o 1

 

 

 

 

 

 

 

 
 We use the term "biophysical" to indicate biological, ecological, hydrologic, chemical, and other physical factors. 2

Reference services (S ) supported by ground water are determined by the without policy o

ground water quantity (X ) and quality (Q ) and subsequent services (S ) are determined by the o o 1

with policy ground water quantity (X ) and quality (Q ). Reference and subsequent ground 1 1

water services are conditional upon given levels of substitute and complementary service flows

(S ) (Box 8). The interactions of scientists and policy analysts facilitate the mapping of changes s

0

in the condition of ground water to changes in service flows which affect economic activities. 

We can then estimate economic value (e.g., willingness-to-pay) as a function of the change in

the ground water service flows, given the specified reference and subsequent ground water

conditions, and service flows from substitutes and complements to the ground water resource

(Box 9).

The steps and linkages illustrated by Boxes 8 and 9 involve the work of economists,

building on the biophysical analyses developed for Boxes 1-7. It is difficult to overemphasize 2

this important point. When it comes to estimating economic values associated with natural

resource service flows, the most complex and limiting step is often establishing clear linkages

between changes in the biophysical condition of a natural resource and changes in natural

resource policies or programs. Economic valuation of ground water therefore requires that

progress be made on two fronts: establishing formal linkages between ground water protection

policies and changes in the biophysical condition of ground water (Boxes 1-7), and developing

these linkages in a manner that allows for the estimation of policy-relevant economic values

(Boxes 8-9). Ideally, steps 1 through 9 involve interactions and cooperation between economists

and other scientists to ensure a smooth and productive flow of data and models to develop

policy-relevant ground water value estimates. 
8

Ground Water Functions

The linkages between biophysical changes in ground water quantity or quality (Box 7),

changes in ground water services (Box 8) and changes in economic values (Box 9) can be better

understood by considering aquifer functions. The biophysical dimensions of ground water

quantity and quality determine two broad functions of any aquifer. The first function is storage

of a water reserve or stock (Table 1). Ground water stored in an aquifer provides a reserve of

water with given quantity and quality dimensions. The quantity dimension includes the amount

of ground water available within a specific geographic region in a given time period, and the

change in this quantity over time from recharge and extraction. Rates of natural recharge,

natural discharge, and human-induced extraction must be considered. Quality includes both

natural and human induced contaminants that may affect the services to which ground water can

be applied in a given time period, and the change in quality over time due to natural filtration

and the leaching of contaminants. The rates of human-induced contamination and natural

sources of contamination must also be considered. 

 
9

Table 1. FUNCTION: STORAGE OF WATER RESERVE (STOCK). Ground water stored in an aquifer provides a reserve (stock)

of water which can be directly used to generate services. Potential service flows and effects of these services are listed below.

SERVICES EFFECTS VALUATION

TECHNIQUES*

1 Provision of Drinking Water Change in Welfare from Increase or Market Price/Demand Function

Decrease in Availability of Drinking Supply or Cost Function

Water Producer/Consumer Cost Savings 

 Hedonic Price/Property Value

Change in Human Health or Health Risks 

Contingent Valuation

Benefits Transfer

Market Price/Demand Function

Supply or Cost Function

Consumer/Producer Cost Savings 

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

2 Provision of Water for Crop Change in Value of Crops or Production Market Price/Demand Function

Irrigation Costs Supply or Cost Function

Change in Human Health or Health Risks Market Price/Demand Function

Consumer/Producer Cost Savings

Contingent Valuation

Hedonic Price/Property Value

Benefits Transfer

Supply or Cost Function

Consumer/Producer Cost Savings 

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

3 Provision of Water for Livestock Change in Value of Livestock Products Market Price/Demand Function

or Production Costs Supply or Cost Function

Change in Human Health or Health Risks Market Price/Demand Function

Consumer/Producer Cost Savings

Contingent Valuation

Hedonic Price/Property Value

Benefits Transfer

Supply or Cost Function

Consumer/Producer Cost Savings 

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer
10

Table 1. Continued

4 Provision of Water for Food Change in Value of Food Products or Market Price/Demand Function

Product Processing Production Costs Supply or Cost Function

Change in Human Health or Health Market Price/Demand Function

Risks Supply or Cost Function

Consumer/Producer Cost Savings

Contingent Valuation

Hedonic Price/Property Value

Benefits Transfer

Consumer/Producer Cost Savings 

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

5 Provision of Water for Other Change in Value of Manufactured Market Price/Demand Function

Manufacturing Processes Goods or Production Costs Supply or Cost Function

Consumer/Producer Cost Savings

Contingent Valuation

Benefits Transfer

6 Provision of Heated Water for Change in Cost of Electricity Market Price/Demand Function

Geothermal Power Plants Generation Supply or Cost Function

Consumer/Producer Cost Savings

Contingent Valuation

Benefits Transfer

7 Provision of Cooling Water for Change in Cost of Electricity Market Price/Demand Function

Other Power Plants Generation Supply or Cost Function

Consumer/Producer Cost Savings

Contingent Valuation

Benefits Transfer

8 Provision Water/Soil Support Change in Cost of Maintaining Market Price/Demand Function

System for Preventing Land Public or Private Property Supply or Cost Function

Subsidence Consumer/Producer Cost Savings

Contingent Valuation

Benefits Transfer

9 Provision of Erosion and Flood Change in Cost of Maintaining Market Price/Demand Function

Control through Absorption of Public or Private Property Supply or Cost Function

Surface Water Run-Off Consumer/Producer Cost Savings

Contingent Valuation

Benefits Transfer

10 Provision of Medium for Change in Human Health or Health Market Price/Demand Function

Wastes and Other By-Products Risks Attributable to Change in Ground Supply or Cost Function

of Human Economic Activity water Quality Consumer/Producer Cost Savings 

Change in Animal Health or Health Market Price/Demand Function

Risks Attributable to Change in Ground Supply or Cost Function

water Quality Consumer/Producer Cost Savings 

Change in Economic Output Market Price/Demand Function

Attributable to Use of Ground water Supply or Cost Function

Resource as "Sink" for Wastes Consumer/Producer Cost Savings 

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

Contingent Valuation

Averting Behavior

Benefits Transfer

Contingent Valuation

Benefits Transfer
11

Table 1. Continued

11 Provision of Clean Water Change in Human Health or Health Market Price/Demand Function

through Support of Living Risks Attributable to Change in Water Supply or Cost Function

Organisms Quality Consumer/Producer Cost Savings 

Change in Animal Health or Health Market Price/Demand Function

Risks Attributable to Change in Water Supply or Cost Function

Quality Consumer/Producer Cost Savings 

Change in Value of Economic Output Market Price/Demand Function

or Productions Costs Supply or Cost Function

Attributable to Change in Consumer/Producer Cost Savings 

Water Quality Contingent Valuation

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

Contingent Valuation

Averting Behavior

Benefits Transfer

Benefits Transfer

12 Provision of Passive or Non- Change in Personal Utility Contingent Valuation

Use Services (e.g., Existence or Benefits Transfer

Bequest Motivations)

*These valuation methods are described briefly in U.S. EPA, 1991 and in greater detail in Braden and Kolstad, 1991 and Freeman, 1993.
12

The second function is discharge to surface water (streams, lakes, and wetlands) (Table

2). In the Eastern U.S., for example, the base flow of many streams and rivers is supported by

ground water discharge. Through discharge to surface water, ground water indirectly

contributes to the services generated by surface waters and wetland ecosystems. Once again

there are quantity and quality dimensions in terms of rates of discharge to surface waters and the

quality of the discharge supply. It should also be noted that surface water may recharge ground

water. In this case, a portion of the services provided under the water reserve or stock function

should be attributed to surface water. To simplify exposition we focus on the flow of water

from ground water to surface water. Similar logic can be applied to develop values for the

effects of surface water flows to ground water. 

The share of surface water services that can be legitimately credited to ground water is

very difficult to quantify. The primary challenge is to model the physical interactions between

ground water and surface water services such that the incremental (marginal) contributions of

ground water discharge to surface water can be identified and measured. This task is necessary

to avoid double-counting of service flows and, in turn, economic values (e.g., attributing the

same service and associated value to both ground water and surface water). For example,

assume an aquifer provides a major source of recharge water for a stream which is heavily used

for recreational fishing. Assume also that normal land run-off also contributes substantially to

the flow of the stream. Suppose two water quality protection policies are implemented during

the same time period. One policy is targeted towards the recharge aquifer and the other is

targeted towards land run-off. 

 
13

Table 2. FUNCTION: DISCHARGE TO STREAMS/LAKES/WETLANDS. Ground water contributes to the flow or stock of water

in streams, lakes, and wetlands. A portion of surface water and wetlands services are therefore attributable to the ground water

resource. Potential service flows and effects of these services are listed below.

SERVICES EFFECTS VALUATION

TECHNIQUES*

1 Provision of Drinking Water Change in Welfare from Increase or Market Price/Demand Function

through Surface Water Supplies Decrease in the Availability of Supply or Cost Function

Drinking Water (Access Value) Consumer/Producer Cost Savings 

Change in Human Health or Market Price/Demand Function

Health Risks Supply or Cost Function

Contingent Valuation

Hedonic Price/Property Value

Benefits Transfer

Consumer/Producer Cost Savings 

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

2 Provision of Water for Crop Change in Value of Crops or Market Price/Demand Function

Irrigation through Surface Water Production Costs Supply or Cost Function

Supplies Consumer/Producer Cost Savings

Change in Human Health or Health Market Price/Demand Function

Risks Supply or Cost Function

Contingent Valuation

Hedonic Price/Property Value

Benefits Transfer

Consumer/Producer Cost Savings 

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

3 Provision of Water for Livestock Change in Value of Livestock Products Market Price/Demand Function

through Surface or Production Costs Supply or Cost Function

Water Supplies Consumer/Producer Cost Savings

Change in Human Health or Health Market Price/Demand Function

Risks Supply or Cost Function

Contingent Valuation

Hedonic Price/Property Value

Benefits Transfer

Consumer/Producer Cost Savings 

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

4 Provision of Water for Food Change in Value of Food Products or Market Price/Demand Function

Product Processing through Production Costs Supply or Cost Function

Surface Water Supplies Consumer/Producer Cost Savings

Change in Human Health or Health Market Price/Demand Function

Risks Supply or Cost Function

Contingent Valuation

Hedonic Price/Property Value

Benefits Transfer

Consumer/Producer Cost Savings 

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer
14

Table 2. Continued

5 Provision of Water for Other Change in Value of Manufactured Market Price/Demand Function

Manufacturing Processes through Goods or Production Costs Supply or Cost Function

Surface Water Supplies Consumer/Producer Cost Savings

Contingent Valuation

Benefits Transfer

6 Provision of Cooling Water for Change in Cost of Electricity Market Price/Demand Function

Power Plants through Surface Generation Supply or Cost Function

Water Supplies Consumer/Producer Cost Savings

Contingent Valuation

Benefits Transfer

7 Provision of Erosion, Flood, Change in Cost of Maintaining Public Market Price/Demand Function

and Storm Protection or Private Property Supply or Cost Function

Change in Human Health or Health Market Price/Demand Function

Risks through Personal Injury Supply or Cost Function

Protection Consumer/Producer Cost Savings 

Change in Economic Output Market Price/Demand Function

Attributable to Use of Surface Water Supply or Cost Function

Supplies for Disposing Wastes Consumer/Producer Cost Savings 

Consumer/Producer Cost Savings

Contingent Valuation

Benefits Transfer

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

Contingent Valuation

Benefits Transfer

8 Transport and Treatment of Change in Human Health or Health Market Price/Demand Function

Wastes and Other By-Products of Risks Attributable to Change in Supply or Cost Function

Human Economic Activity Surface Water Quality Consumer/Producer Cost Savings 

through Surface Water Supplies Contingent Valuation

Change in Animal Health or Health Market Price/Demand Function

Risks Attributable to Change in Supply or Cost Function

Surface Water Quality Consumer/Producer Cost Savings 

Change in Economic Output Market Price/Demand Function

Attributable to Use of Surface Water Supply or Cost Function

Supplies for Disposing Wastes Consumer/Producer Cost Savings 

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

Contingent Valuation

Averting Behavior

Benefits Transfer

Contingent Valuation

Benefits Transfer
15

Table 2. Continued

9 Support of Recreational Change in Quantity or Quality Market Price/Demand Function

Swimming, Boating, Fishing, Recreational Activities Supply or Cost Function

Hunting, Trapping and Plant Consumer/Producer Cost Savings 

Gathering Contingent Valuation

Change in Human Health or Health Market Price/Demand Function

Risks Supply or Cost Function

Travel Cost Method

Benefits Transfer

Consumer/Producer Cost Savings 

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

10 Support of Commercial Fishing, Change in Value of Commercial Market Price/Demand Function

Hunting, Harvest or Costs Supply or Cost Function

Trapping, Plant Gathering Consumer/Producer Cost Savings 

Contingent Valuation

Benefits Transfer

11 Support of On-Site Observation Change in Quantity or Quality of On- Market Price/Demand Function

or Study of Fish, Wildlife, and Site Observation or Supply or Cost Function

Plants for Leisure, Educational, or Study Activities Consumer/Producer Cost Savings 

Scientific Purposes Contingent Valuation

Travel Cost Method

Benefits Transfer

12 Support of Indirect, Off-Site Fish, Change in Quantity or Quality of Market Price/Demand Function

Wildlife, and Plant Uses (e.g. Indirect, Off-Site Activities Supply or Cost Function

viewing wildlife photos) Consumer/Producer Cost Savings 

Contingent Valuation

Travel Cost Method

Benefits Transfer

13 Provision of Clean Air through Change in Human Health or Health Market Price/Demand Function

Support of Living Organisms Risks Attributable to Supply or Cost Function

Change in Air Quality Consumer/Producer Cost Savings 

Change in Animal Health or Health Market Price/Demand Function

Risks Attributable to Supply or Cost Function

Change in Air Quality Consumer/Producer Cost Savings 

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

Contingent Valuation

Averting Behavior

Benefits Transfer
16

Table 2. Continued

14 Provision of Clean Water through Change in Human Health or Health Market Price/Demand Function

Support of Living Organisms Risks Attributable to Supply or Cost Function

Change in Water Quality Consumer/Producer Cost Savings 

Change in Animal Health or Health Market Price/Demand Function

Risks Attributable to Supply or Cost Function

Change in Water Quality Consumer/Producer Cost Savings 

Change in Value of Economic Output Market Price/Demand Function

or Productions Costs Supply or Cost Function

Attributable to Change in Water Consumer/Producer Cost Savings 

Quality Contingent Valuation

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

Contingent Valuation

Averting Behavior

Benefits Transfer

Benefits Transfer

15 Regulation of Climate through Change in Human Health or Health Market Price/Demand Function

Support of Plants Risks Attributable to Supply or Cost Function

Change in Climate Consumer/Producer Cost Savings 

Change in Animal Health or Health Market Price/Demand Function

Risks Attributable Supply or Cost Function

to Change in Climate Consumer/Producer Cost Savings 

Change in Value of Economic Output Market Price/Demand Function

or Production Costs Supply or Cost Function

Attributable to Change in Climate Consumer/Producer Cost Savings 

Contingent Valuation

Hedonic Price/Wage

Averting Behavior

Benefits Transfer

Contingent Valuation

Averting Behavior

Benefits Transfer

Contingent Valuation

Benefits Transfer

16 Provision of Non-Use Services Change in Personal Utility Contingent Valuation

(e.g., Existence Services) or Satisfaction Benefits Transfer

Associated with Surface Water

Body or Wetlands Environments

or Ecosystems Supported by

Ground water

*These valuation methods are described briefly in U.S. EPA, 1991 and in greater detail in Braden and Kolstad, 1991 and Freeman, 1993.
17

 Assume the policies will collectively increase recreational fish catch by 50%. The economic

value of this increase in fish catch cannot be attributed to both policies. In order to avoid doublecounting, the total economic value of this increase in fish catch should be divided between the

two policies based on the relative contribution of each policy to the 50% increase in fish catch.

Because of the interrelationships between ground water and surface water, surface water

recharge to ground water and from ground water discharge to surface water, the aquifer

functions listed in Tables 1 and 2 are not independent. Ground water recharge and discharge are

both part of the water reserve or stock function because each affects the quantity and quality of

water which exists in an aquifer in a given time period. Ground water recharge and discharge

also are both part of the surface discharge function because both affect the quantity and quality

of surface water. Because ground water discharge affects a different set of economic services

supported by surface water quantity and quality, we include ground water discharge to surface

water as a separate function (primarily for economic benefit accounting purposes). From a

biophysical or ecologic perspective, however, it should be kept in mind that our two broad

functions are highly interrelated. Interrelationships between these two functions need to be

accounted for when modeling the linkages between policy changes, changes in ground water

quantity or quality, and changes in economic values, as illustrated in Figure 1.
18

Ground Water Services

As with value, we use the term "service" in a neutral sense to imply that a service is

neither inherently good nor bad. Services may have both positive and negative effects,

depending upon the affected party's preferences or perspective. Services associated with the

water reserve or stock function are listed in Table 1. A major service with this function is the

provision of drinking water. In the United States, ground water accounts for about 35 percent of

public water supplies and 80% of rural domestic supplies (American Institute of Professional

Geologists, 1985). Overall, ground water supplies drinking water to 53 percent of the U.S.

population (this figure includes private wells). Ground water is also extracted for use in

irrigated agriculture, many industrial purposes, heated water for geothermal power plants, and

cooling water for other power plants. 

In some regions of the United States, ground water provides the service of supporting

underground water/soil structure which acts to prevent land subsidence (sinkholes). The water

storage function also helps to control flooding and erosion by providing a medium for absorbing

surface water run-off. The underground water/soil structure of an aquifer also provides a

medium for the absorption, transport, and dilution of wastes (e.g., sewage) and other by-products

of human economic activity. Note that each of these services are jointly provided by soil

structure and ground water in a given area. As with the services of the surface water discharge

function, the incremental (marginal) contributions of ground water to these services must be

quantified.

An aquifer may also generate non-use or passive use services (Bishop and Welsh, 1992;

Freeman, Chap. 5, 1993). For example, these services may be attributable to the mere existence
19

of an aquifer, independent of any current or future use. Alternatively, passive use services of

providing potable drinking water to future generations may arise from bequest motivations on

the part of the current generation.

Most major services provided by ground water under the water reserve or stock function

are also included as indirect services associated with the surface water discharge function (Table

2). To the extent that ground water supports healthy and abundant surface waters, it also

contributes to a variety of services generated by these environments. These services include

recreational swimming, boating, fishing, hunting/trapping and plant gathering, and commercial

fishing, hunting/trapping and plant gathering. Unless biophysical data are available to identify

ground water's marginal contributions to these services, there is a high probability of double

counting such that surface water values may be assigned to ground water or vice versa.

Effects of Changes in Ground Water Services

Moving towards the goal of estimating changes in economic values (Box 9, Figure 1), we

need to identify the effects on (changes in) economic activities resulting from changes in ground

water services. Examples of potential effects on economic activities are listed in the second

columns of Tables 1 and 2. Under the "stock" function, for example, the potential effects of a

change in the provision of drinking water include a change in utility from an increase or

decrease in the availability of drinking water (access/quantity) and a change in human health or

health risks (quality). 

Defining changes in human health or health risks requires careful consideration of such

issues as changes in mortality and morbidity, and cancerous and noncancerous health threats. 

Identification of the various types of health effects which can result from changes in ground
20

 See Boyle and Bishop (1987) for an application of total valuation to valuing endangered 3

species.

water quality requires input from health professions. What is ultimately needed are doseresponse models that link contaminant sources to changes in contaminants in ground water and

then changes in human health. These dose-response models will facilitate defining the baseline

and alternative service flows (S and S ) and the estimation of policy-relevant values. Such o 1

linkages are essential for identifying changes in all service flows, not just human health effects. 

Measuring Economic Values

Complete valuation of a change in the condition of ground water involves measuring the

economic values for all relevant changes in ground water services associated with changes in the

X and Q vectors. Economic values for ground water protection or remediation should capture

the value for the total change in the ground water condition (X - X , Q - Q ). Thus, as 1 o 1 o 3

suggested in the previous section, extensive knowledge of the ground water resource itself and

its functions are crucial to defining the change in service flows, and the effects on economic

activities of these changes in service flows.

Once changes in ground water services are identified and quantified (Box 8, Figure 1),

the final step in the benefit estimation process is to assign monetary values to these service

changes (Box 9, Figure 1). When measuring the economic value of environmental changes,

theoretically appropriate measures of changes in consumer and producer welfare (or well-being)

must be used. There is a consensus among economists that Hicksian compensating or equivalent

welfare measures should be used (Freeman, Chaps. 3 and 4, 1993; Just, Hueth, and Schmitz,
21

1982; Varian, 1978). Because of problems with estimating willingness to accept, the most

commonly applied measure of natural resource economic values is an individual's maximum

willingness to pay (WTP). Hicksian WTP measures (compensating or equivalent) should reflect

both the quantity and quality dimensions of the ground water resource being valued. 

A number of empirical techniques are available for estimating changes in economic value

associated with changes in ground water services. We do not attempt to define and explain each

potential valuation technique in detail in this report. An overview of valuation techniques

relevant to ground water quantity and quality is provided in U.S. EPA: Appendix A, (1983) and

in Bergstrom, et al, (1996). More detailed descriptions of valuation techniques for

environmental policies, including advantages and disadvantages of the various techniques, can

be found in a number of references (e.g., Braden and Kolstad, 1991; Freeman,1993). We list

potential valuation techniques for changes in ground water services in the last column of Tables

1 and 2. Although we advocated estimates of Hicksian welfare in the preceding paragraph, each

of the techniques listed in the tables that utilize market, or choice, based data yield estimates of

Marshallian surplus, i.e., income is held constant rather than utility. We do not intend to imply

that estimates of Marshallian surplus are not appropriate for valuing ground water. Rather, these

are not the conceptually desired measures.

Selection of a valuation technique for a particular policy application (e.g., RIA) involves

many considerations. All else constant, techniques that measure maximum Hicksian WTP with

minimal bias are preferred. Consumer/producer cost savings estimates, for example, may only

provide minimum estimates of value because they do not reflect maximum WTP based on

consumer preferences or producer production functions. Another major consideration is data
22

availability. In many environmental valuation situations, revealed preference data (e.g., water

market data) are not available. In contrast, contingent valuation relies on stated preference data

(e.g., data on preferences obtained directly from people in a survey setting), measure Hicksian

WTP directly, and can be applied to value a wide variety of the services listed in Tables 1 and 2. 

The largest distinctions between contingent valuation and revealed preference techniques is that

contingent valuation measures Hicksian surplus and is the only methodology capable of

measuring nonuse values. The application of contingent valuation to measuring nonuse values,

however, is currently a subject of much debate (e.g., see Arrow et al, 1993). 

Other important factors an analyst must consider when selecting a valuation technique

include the time and expense involved in implementing the technique as compared to the timing

of policy decisions for which the value estimates are needed and the available budget for the data

collection and value estimation process. Related to the time and expense of implementing a

valuation technique is the decision-makers desired levels of accuracy and reliability associated

with value estimates. In general, increased accuracy and reliability (in a statistical sense)

requires greater allocations of both time and money. For certain policy decisions, extremely

high levels of accuracy and reliability may be required. For other policy decisions, decisionmakers may be able to tolerate ("make do with") lower levels accuracy and reliability.

In a number of cases, the selection of a valuation technique, or techniques, is a fairly

clear-cut decision (e.g., data availability may dictate the decision). In other cases, the decision

may not be so clear. The final selection is likely to involve a "balancing" of all relevant

considerations (e.g., theoretical consistency, data availability, estimation robustness, time

constraints, budget constraints, acceptable accuracy and reliability). 
23

Aggregation Issues

Once the economic value of ground water to an individual is determined, aggregate

economic value is estimated by summing individual economic values (e.g., mean willingness-topays) over the total number of people in the "market area" of a particular aquifer who utilize

water from the aquifer, and summing these values over time (Freeman, Chap. 7, 1993). For a

given aquifer, there are likely to be different market areas associated with each of the services

listed in Table 1. Determining the scope of these market areas is a complex process, involving

careful study of the spatial distribution of consumers and producers who benefit from the

services of ground water from a specific aquifer.

There is not, however, a clear consensus in the literature as to how to determine market

size. Nearly all environmental economists agree that the market should include all individuals

who are affected by a change in the condition of ground water resource, but this agreement

breaks down when discussions move to who specifically is affected. This problem is

exacerbated for nonuse values. In addition, physical data is often missing to develop direct links

between changes in ground water and potentially affected populations, as we will note in the

review of existing ground water valuation studies (the does-response function called for above).

Ground water policies also result in changes in the flow of ground water services over

some time horizon (e.g., 50 years). The economic value of the policy in each time period (t) is

the difference in the value of ground water quantity and quality with the policy in that time

period (X ,Q ) and the value of what ground water quantity and quality would have been without t t

1 1

the policy (X ,Q ). That is, t t

0 0

S = S (X ,Q ) - S (X ,Q ). t t t t t t t

1 1 1 0 0 0
24

The total value of the ground water resource over the planning horizon (T) is the discounted sum

of the values attributable to all individuals affected by the change in ground water services in

each time period ( S ). t

Uncertainty in Ground Water Valuation

Because we have to deal with imperfect data regarding the quantity and quality of ground

water, the actual changes in ground water services may be uncertain with associated probabilities

of occurrence. This uncertainty may exist with respect to both the current level of services (S )

o

projected into the future and the alternative level of services (S ). Thus, we are dealing with 1

expected, rather than deterministic, changes in services.

The expected changes in ground water service flows is a function of possible alternative

changes in the baseline and future ground water conditions, and the probabilities of each one of

these alternatives occurring. In some situations, there may be a number of possible alternative

service flow changes, each having a different probability of occurring. In other situations, there

may be only one service flow of interest with several competing policies for accomplishing the

goal and each policy has a different probability of success.

When demand and (or) supply uncertainty are present, measures of economic value (e.g.,

willingness-to-pay) should reflect this uncertainty. The appropriate welfare measure is option

price (Bishop, 1982; Smith, 1983; Freeman, Chap. 8, 1993). Option price is defined as a

representative individual's maximum willingness-to-pay to obtain a specific ground water

condition with certainty. Measurement of option prices is primarily accomplished using

contingent valuation (Mitchell and Carson, 1989).
25

Intergenerational Issues

In many cases, the effects of ground water depletion and contamination may be longterm in nature, raising concerns related to intergenerational equity and irreversibility. The

process of discounting benefits to calculate present values automatically downweights future

benefits. Assuming the same monetized value of aggregate benefits in each time period,

discounting results in an ever decreasing present value of benefits in each successive time

period. After a certain point in the future (e.g. 50 years), the discounting process renders the

present value of future benefits trivial. Thus, it is sometimes argued that the process of

discounting or downweighting future benefits to calculate present values is "unfair" to future

generations. Moreover, the benefits, costs and discount rate used in any analysis are solely

representative of the preferences of the current generation.

Intergenerational equity or fairness concerns have resulted in debates over how best to

(or not to) discount future benefits. These concerns have often focused discussion on the choice

of a discount rate to use in calculations of net present values. Individuals and groups who desire

to see more weight placed on future benefits, for example because of concern over the wellbeing of unborn generations, argue for lower discount rates. Individuals and groups who are

more worried about the negative effects on the current economy of reducing current private

consumption argue for higher discount rates (Sassone and Schaffer, Chap. 6, 1978).

The discount rate used in ground water policy analysis, or the analysis of any public

program, is based on societies' marginal time preference for consumption. Since this concept is

difficult to quantify, we believe the choice of a discount rate is fundamentally a normative
26

 Benefit estimates are based on the preferences of the current generation and the choice of a discount rate is based 4

on the preferences of the current generation. Benefit-cost analyses, therefore, contain the implicit assumption that

preferences do not change over time. Special concern for future generations only enter if nonuse values, based on

bequest motivations perhaps, are included in the benefit assessment.

decision. In the case of environmental policy analyses, this decision has been made by some

branch or office of the federal government (Office of Management and Budget, 1992). That is,

the discount rate which should be used to discount future ground water benefits (which reflects

some subjective assessment of the preferences of future generations and weighting of their wellbeing) is "handed down" to policy analysts. Although ground water policy analysts may be 4

required to use a certain discount rate, the present value of future ground water benefits can be

calculated using a variety of discount rates to assess the sensitivity of present-value calculations

to the choice of a discount rate. Sensitivity analyses should not be used to identify a desired

outcome, but to examine the effects of a number of plausible discount rates.

Concerns over the effects of current policy decisions on future generations intensify

when suspected irreversibilities are present. For example, suppose a particular aquifer is

threatened by contamination, purification of the aquifer would be extremely costly and natural

filtration may take decades or longer. Also, suppose that the aquifer is not currently a significant

source of water for human use. However, there is a chance, because of population growth, that

the aquifer may become a major source of water for humans in the future. The uncertainty of

future population growth combined with the discounting process may result in very low weights

being placed on the possible future benefits of protecting the aquifer from contamination. 

Consequently, a policy to protect the aquifer from contamination may not pass a standard

benefit-cost test.
27

Whether or not these costs should be borne by future generations is largely a normative

issue. The flip-side of the issue is that protecting the aquifer from contamination may impose

major costs on the current generation. Paying these costs may reduce the well-being of the

present generation, and could end up having little or no effect on future generations if future

demand for water from the protected aquifer never materializes.

When uncertainty and irreversibility are major issues and benefits to future generations

are of concern, the costs to the present generation of protecting ground water should be

considered but may not comprise the definitive decision criteria. Although the economics of a

safe minimum standard (Bishop, 1993) for resource protection are not clear (Ready and Bishop,

1991), decision makers may still want to consider protecting selected ground water resources if

the costs to the present generation are not unreasonably high. In such cases, ground water

managers may want to develop several policy scenarios for protecting ground water resources

and then investigate the cost effectiveness of accomplishing the protection programs. The

question remains whether the protection costs are unreasonably high since benefits no longer

play a central role? This again is a normative decision which must eventually be made at some

administrative level. 

III. PREVIOUS GROUND WATER VALUATION STUDIES

Although we acknowledge service flows of ground water received by both private

individuals and commercial interests, our exposition in this section focuses on ground water

values held by individuals. The parameters of ground water valuations differ between

applications to consumers and commercial interests, but we do not loose generality regarding the
28

 See Boyle (1994) for a more complete discussion of these studies. 5

complexity of commodity specification by considering one group of users. Previous ground

water valuation studies have used contingent valuation (Boyle, 1994; Boyle et al., 1994) avoided

costs (Raucher, 1986) or avoidance expenditures (Abdalla et al, 1992; Abdalla, 1994) to estimate

ground water benefits held by individuals.

To illustrate the scope of work involved with defining and measuring ground water

values, we include a review here of the previous ground water studies which used contingent

valuation. When applying contingent valuation to measure ground water values, it is necessary

to explain the change in the condition of ground water (commodity definition) to survey

respondents. The full complexity of the ground water valuation problem is encountered head-on

when attempting to explain the ground water commodity to survey respondents in contingent

valuation studies.

To our knowledge there have been nine contingent-valuation studies of ground water

conducted to date; eight in the United States and one in the United Kingdom. We discuss the

studies conducted in the U.S. (Table 3). The first study was conducted by Edwards (1988) and 5

estimated the benefits of reducing the probability of ground water contamination in the

community of Falmouth, Massachusetts. Shultz (1989) also estimated the benefits of reducing

the probability of ground water contamination, but in Dover, New Hampshire (see also Schultz

and Lindsay, 1990). Sun (1990) estimated the benefits of protecting ground water in Dougherty

County, Georgia such that contamination levels would be below U.S. EPA health advisory

standards (see also Sun et al., 1992). Powell (1991) evaluated the protection of ground water in

15 communities located in Massachusetts (four), New York (four) and Pennsylvania (seven) (see
29

also Powell and Allee, 1991). Caudill (1992) estimated the benefits of protecting groundwater

in Michigan (see also Caudill and Hoehn, 1992). McClelland et al. (1992) estimated the national

benefits of cleaning ground water contaminated by landfills. Jordan and Elnagheeb (1993), like

Sun, estimated the benefits of protecting ground water so that contamination levels would be

below health advisory levels, but for the entire state of Georgia. Finally, Poe (1993) estimated

the benefits of protecting ground water so contamination levels would not exceed health

advisory levels in Portage County, Wisconsin. In Table 3 we cite the most recent study first and

then work backwards listing studies in reverse chronological order.

Despite their small number, these ground water valuation studies present a wide variety

of applications. In the geographical dimension, for example, the applications range from

individual communities (Powell, 1991; Shultz, 1989; and Edwards, 1988) to counties (Poe, 1992

and Sun, 1990) to states (Jordan and Elnagheeb, 1993; Caudill, 1992) to national estimates

(McClelland et al., 1992). This diversity presents both advantages and disadvantages. The

advantage is available value estimates potentially reflect a variety of ground water conditions at

the study sites that enhance the potential for these studies to collectively provide the value data

necessary for accomplishing a RIA. The disadvantage is there is very little depth to the value

data pertaining to specific attributes of ground water conditions.

All eight studies focus on quality dimensions of the "stock" function of ground water. 

This focus is an artifact of the studies being primarily designed to value ground water as a source

of drinking water. Although changes in the quality of ground water can affect the quality of

surface waters, we suspect hydrologic data were not available to make these connections. All of

the studies, except McClelland et al. (1992), employ the implicit assumption that the stock of
30

ground water is currently sufficient to meet demand, but the quality of supply is threatened by

contamination. McClelland et al. ask their survey respondents to assume that contamination will

result in a shortfall of potable water.

In Table 3 we consider the condition of ground water in each of the study areas before

presenting the studies' baseline and reference ground water commodity specifications. Four of

the studies have information that indicates ground water in the study areas is contaminated (Poe,

1992; Caudill, 1992; McClelland, 1992; and Powell, 1991), and the other four implicitly assume

the current condition is uncontaminated, or at least is below health advisory standards. The

question marks beside the entries for these latter four indicate that we are unsure what survey

respondents assumed regarding the current groundwater conditions when answering the

valuation questions. Poe (1993) established contamination levels by mailing respondents water

testing kits with which water samples were submitted for analysis. McClelland et al. (1992)

asked respondents about their knowledge of ground water contamination in their community and

selected one subsample in a location with a history of contamination. Powell (1991) selected

communities for study based on whether they had a history of ground water contamination.

Three studies considered nitrate contamination (Poe, 1992; Jordan and Elnagheeb, 1993;

and Edwards, 1988), while two studies considered concurrent nitrate and pesticide contamination

(Caudill, 1992; Sun, 1990), one study considered chemical and diesel fuel contamination

(Powell, 1991), and the type of contaminates were not specified in the McClelland et al. (1992)

study. Respondents to the McClelland et al. (1992) survey were told contamination was from a

landfill. We presume respondents employed subjective perceptions as to what contaminants

were leaching into ground water.
Table 3. Ground Water Condition in Study Areas

Authors Current Condition Type of Contamination Source of Drinking Water

(Publication Dates)

Poe (1993) 18% of wells have nitrates in Nitrates 100% private wells (Question 1 in survey to

 excess of safety standard screen out individuals on public supply)

Jordan and Elnagheeb Safe (?) Nitrates 78% public systems

(1993) 11% private wells

Caudill (1992); 87% to 50% of wells above Nitrates and 43% of Michigan's households rely on

Caudill and Hoehn standards pesticides ground water

(1992)

McClelland et al. From Version A of survey Not specified From Version A of survey

(1992) -56% knew of ground water -51% said part of all of household's water comes

 contamination in from ground water

 community

 -13% said community draws

 water from contaminated

 wells or wells in danger of

 contamination

Powell (1991); Powell 7 communities experienced Trichlorethylene in 18% private wells

and Allee (19??) contamination in past 10 years 6 counties--MA 82% public water supply

 8 communities had no history (2), NY (2), PA (2) -communities draw water supply from 

of contamination Diesel fuel--NY ground water

(1) -percent of community on public supply ranges

 from 0% to 100%

Sun (1990) Safe (?) Agricultural Nearly 100% private wells

 fertilizers (nitrates)

 and pesticides

Shultz (1989) Safe (?) Not specified 100% private wells

Edwards (1988) Safe (?) Nitrates 89% public systems

 -communities draw water supply from 

ground water

 11% private wells
32

Table 4 outlines the commodity descriptions used in each of the studies, and it is these

descriptions that form the link between the physical data on ground water conditions at study

sites, as discussed in Figure 1, and service flows provided by ground water within each study

area (Tables 1 and 2). It is important to note that most of the studies asked respondents to

evaluate more than one scenario of ground water contamination. In the discussion here we focus

on selected scenarios that give the flavor of the commodity descriptions employed in the studies.

Having previously discussed the current ground water condition in the study areas, as

presented in study publications, it is interesting to note the reference ("without policy") condition

respondents were asked to assume when answering the contingent-valuation questions. Poe

(1993), Jordan and Elnagheeb (1993) and McClelland (1992) provided information in the survey

questionnaire which objectively defined the reference condition of drinking water services. 

Powell (1991), Sun (1990) and Edwards (1988) measured respondents' subjective perceptions of

the reference condition of drinking water services in the study areas. In these studies, the

investigators appear to have made a conscious decision to conduct the valuations based on

respondents subjective perceptions of the reference condition. Caudill (1992) and Shultz (1989)

did not establish either an objective or subjective reference conditions for their valuation

exercises. 
33

Table 4. Information Presented on Ground Water Commodity (Change in Services)

Author(s) Reference Condition Subsequent Condition

(Publication dates)

Poe (1993) Stage I - respondents told Below health standards

18% of wells above health

standard

 Stage II - well-specific test

results provide

Jordan and Elnagheeb Asked to assume level of Reduce levels to below safety

(1993) nitrates exceed safety standard

standard

McClelland et al. Asked to assume 40% of Complete cleanup

(1992) supply from 

ground water is 

contaminated

Caudill (1992) Subjective perceptions Well water - eliminate health

measured threat

Powell (1991) Respondents subjective Very Safe - "I feel 

rating of ground water absolutely secure. I have 

condition (unsafe, no worries about the 

somewhat safe, safe, or very safety of the community 

safe) water supply at present. I 

am certain the level of 

protection is excellent and I

cannot foresee any 

contamination occurring in 

the future."

Sun (1990) Subjective perceptions Protect so below EPA 

measured health advisory levels for 

pesticides and fertilizers

Shultz (1989) Not specified objectively Reduce potential of 

 or subjectively contamination (increment 

not specified)

Edwards (1988) Subjective perceptions Future contamination -in 

measured 5, 10, 20, or 40 years

 -0%, 25%, 50%, 75% or 

 100% probability of 

contamination
34

 The possibility of subjective editing of information points out the desirability of eliciting information about 6

respondents' subjective assessments of the ground water valuation scenario so that these subjective assessments (e.g.,

subjective risk assessments) can be incorporated into value estimation, interpretation and application. 

All eight studies specified the subsequent ("with policy") condition of services. Each

study took a different approach to describing the change in services to be valued as defined by

equation 1, some providing more complete definitions than others. Poe offered the most

complete commodity definition. Poe conducted his study in two stages. In the first stage

respondents water was tested for contaminants. In the second stage the well-specific test results

were used to set the reference condition and the subsequent condition was below health

standards. In contrast, Powell's respondents rated current conditions on a four point scale,

ranging from "unsafe" to "very safe". In the valuation exercise, respondents' subjective rating of

the current condition of drinking water services became the reference condition, and then stated

a value for an increase in water quality to a rating of "very safe". This approach allowed

respondents to translate the information presented and frame their own commodity definitions

when responding to the contingent-valuation questions.

Studies attempting to completely (Poe, 1992; Jordan and Elnagheeb, 1993; and

McClelland, 1992) or partially (Sun, 1990; Schultz, 1989; and Edwards, 1988) frame the change

in ground water services have both strengths and weakness. The strength of completely

specifying commodity descriptions is experimentally induced bias and variation in valuation

responses may be reduced. The disadvantage is respondents may reject the objective

information resulting in valuation responses that are based on subjective perceptions (Kask and

Maani, 1992; and Lichtenstein, et al., 1978). The Powell study meets this hurdle head on, but 6
35

also raises questions. For instance, how can value estimates, based on subjective perceptions, be

linked to actual changes in ground water conditions? These are fundamental issues in any

environmental commodity valuation study. These questions must be addressed if ground water

value estimates are to be useful for public-policy analyses.

A basic insight from this overview is that the library of ground water valuation studies

measuring individual values is very thin in terms of the number of studies, and consequently, in

terms of values for specific dimensions of ground water. For example, all eight studies account

for only the direct provision of drinking water service (service row 1, Table 1). This implies a

need for more primary data on values for other ground water services if the library of ground

water value studies is going to be sufficient for RIAs (and other policy needs). Original

valuation studies are needed for all of the potential service/effect flows of ground water

identified in Tables 1 and 2.

Another basic insight from this overview is that to be useful for policy assessment,

valuation studies must be very detailed and complete. For example, following the valuation

framework summarized by Figure 1 and Tables 1 and 2, the basic ground water information

required for policy analysis is changes in ground water service flows. Assessment of this change

requires knowledge of the current (baseline), reference, and subsequent ground water conditions. 

In general, the descriptions of the current, reference, and subsequent ground water conditions are

quite vague in the eight studies. This vagueness makes it difficult to establish the linkages

between changes in ground water policies, ground water conditions, services provided, and

estimated values. Of particular concern is the difficulty of ascertaining how the value estimates
36

correspond to actual biophysical changes in ground water resources and the resulting change in

service flows.

If valuation studies do not provide sufficient information for establishing the technical

linkages illustrated in Figure 1 and Tables 1 and 2, the usefulness of valuation estimates for

policy assessment is greatly reduced. Valuation studies need to measure values for changes in

service flows that have clear linkages to biophysical changes in ground water resources. To

complete the policy assessment process, clear linkages must also be established between changes

in ground water policies and biophysical changes in ground water resources. Improvements are

needed in the assessments conducted by physical scientists and economists, and these

investigations need to work to enhance the interfaces between these analyses. The difficulties

encountered when assessing changes in ground water policies are further illustrated by

considering two policy assessment case studies in the next section. 
37

 Although our focus is on potential benefits, the discussion also provides insight on potential 7

costs of a proposed regulation since social costs are often foregone benefits (or opportunity

costs).

IV. GROUND WATER VALUATION AND REGULATORY IMPACT ANALYSES

U.S. Presidential Executive Order 12866 issued in 1994 instructs government agencies to

conduct regulatory impact analyses (RIAs) on all major regulations. RIAs are to include

assessments of the benefits and costs of the full range of effects associated with a proposed

regulation (USEPA, 1991). The full range of effects includes benefits and costs which can be

quantified monetarily, and those which cannot be quantified monetarily. The RIA guidelines 7

were developed for evaluating any type of environmental regulation, e.g., air, surface water or

ground water. Our focus is specifically on ground water. In the remainder of this section we

will review two RIAs that dealt with ground water resources while complying with the overall

RIA guidelines. Our general process for evaluating these RIAs is to consider how the benefit

assessment components correspond to the framework we have proposed in this report. 

Draft Class V Injection Well Regulatory Impact Analysis

The purpose of this RIA was to consider the benefits of regulating Class V industrial

wells. Four types of industrial facilities operating Class V injection wells were considered as

case studies: automotive repair, dry cleaning, metal fabrication and electroplating. Within each

industry actual pollution incidents or events were considered.

Class V injection wells represent a case where groundwater is used as a medium to

dispose of wastes (Row 10 in Table 1). In the current RIA, disposal is presumed to pose a

human health threat so injections of waste are being proposed for regulation.
38

Within the empirical section of this RIA, Chapter 4, a very specific perspective is taken

regarding benefits. Detailed breakdowns of contaminants and contaminant concentrations were

developed for the RIA. No discussion of the dispersion of the contaminants were provided and

explicit consideration was not given to the multifaceted ground water services documented in

Tables 1 and 2. Only human health risks were quantified, the quality component of Row 1 in

Table 1. Although a larger domain of benefits may have been considered for inclusion in the

analysis, we could not discern this from the available documentation.

Benefits were computed using breakeven analyses (contaminant concentration resulting

in zero net benefits) and an averting behavior approach (avoidance cost). Health benefits for the

breakeven analysis were computed using the number of statistical lives saved and a range of

values from the literature were employed. Uncertainty was considered in the analyses by

considering the expected efficiency of proposed regulations. Avoidance costs were based on the

most cost efficient response to the contamination events and uncertainty was factored in by

considering the probability that contamination would go undetected. Both of these approaches

are likely to give minimum estimates of value because they do not reveal the public's maximum

willingness to pay to avoid contaminated ground water.

The primary questions that arise when the analyses for this RIA are compared to the

ground water valuation framework in Section II are:

Were important benefit categories omitted?

Were benefits of reducing health risks underestimated?

These issues may not be relevant for the RIA, but the available documentation does not allow us

to answer these questions.
39

Draft RIA for Final Rulemaking on Corrective Action for Solid Waste Management 

Units

The purpose of this RIA was to present methodology to be used to estimate costs and

benefits of site cleanup at hazardous waste facilities regulated under the Resource Conservation

and Recovery Act. An application is included to provide an illustration of the methodology. We

concentrate our discussion on the benefits component of the application.

Referring back to Figure 1, the RIA clearly defined the reference and subsequent ground

water conditions and projected these conditions through time as we recommend in Section II. 

This work was done through interactions of environmental scientists, economists and engineers,

an approach we also advocate to provide policy relevant value estimates. Notably, the RIA

focus on the quality of ground water, thus ground water services listed in rows five through nine

of Table 1 can be reasonably excluded because the physical stock of ground water would not

appear to be affected by the action being evaluated.

The types of values estimated include human health benefits, ecological benefits, and

nonuse values. Health benefits from protecting ground water arose from reducing three paths of

exposure: ingesting contaminated drinking water, inhaling volatile compounds during household

use of ground water, dermal uptake while showering. The pathways of contamination arise from

drinking ground water and household uses of ground water (first row of Table 1). From the

information provided in the RIA we can not discern whether other indirect pathways of human

health effects, (rows two through four in Table 1) were not considered or were deemed to be

minor or were not relevant.

The averted water use applied the cost of water treatment as a proxy for benefits, likely

yielding an underestimate of benefits in this category. This component measures the access
40

value of potable drinking water in Row 1 of Table 1. No mention is made of averting costs for

commercial users of ground water, (rows two through seven of Table 1). If commercial users

derive their water from municipal sources, then the benefits accruing to these users may have

been counted. If commercial users derive ground water from private wells and invest in

purification, benefits in this category are underestimated.

National nonuse benefits were estimated, addressing Row 12 of Table 1. Nonuse

benefits were not estimated for the function of ground water discharging to surface water. For

each of the benefit categories listed in Tables 1 and 2, data were developed for specific

contamination sites. The RIA does not discuss how national averages of nonuse values should,

or can, be adjusted for application to corrective actions at specific sites.

The property value analysis considered the effects on residential property values located

near solid waste facilities. Although this is a valid method for estimating ground water values,

property value effects may result in double counting with the use value measures. Precisely, is

there double counting with the averted-cost and hedonic-price measures of benefits? Since an

integrative framework for the various benefit components is not given and the component value

estimates are implicitly assumed to be additive, it is difficult to ascertain if double-counting of

benefits occurred.

The solid waste corrective action RIA appears to be consistent with the ground water

valuation framework we proposed in Section II. Despite the general consistency of the

approaches, issues that arise when comparing the RIA with our proposed ground water valuation

framework are:
41

Were some of the indirect effects of contaminated ground water inadvertently

overlooked, e.g., health effects other than household consumption?

Were use benefits underestimated due to use of averting expenditures and not

considering commercial users of ground water?

Does the lack of a conceptual framework for integrating the various benefits

estimates lead to double counting of some benefit components?

As noted for the previous RIA, these issues do not necessarily imply problems in the RIA, but do

imply an expanded scope of benefits needs to be considered in the design and reporting of RIAs.

Summing Up

The solid waste RIA appears to be much closer to the ground water valuation framework

in Section II than is the injection well RIA. This difference may be due to reporting or the

injection well RIA may indeed have taken too narrow of a scope when considering potential

benefits of the action. Given the applications, we ask whether important benefit categories were

omitted in both RIAs and whether values may have been underestimated for benefit categories

considered. Both of these issues, if present, will lead to under estimates of total benefits vis a vis

total costs of the implementing the regulations. No information is reported regarding what

components of values were considered, but not analyzed for the RIAs.

The injection well RIA explicitly considered uncertainty and did implicit sensitivity

analyses by considering different levels of regulation. No comparable analyses were reported

for the solid waste RIA. Given the complexity of ground water resources and services,

uncertainties regarding ground water conditions, and difficulties in measuring benefit categories,
42

we strongly urge that all ground water RIAs should consider potential sources of uncertainty and

conduct sensitivity analyses to investigate the robustness of assumptions employed in analyses.

Finally, neither analysis even opened the door for considerations of intergenerational

equity issues. Although this is a very difficult issue, which we did not attempt to solve in

Section II, consideration should be given to the fact that all benefits and costs arise from the

preferences of the current generation given available technology. Simultaneously, either

implementing or not implementing ground water policies can have substantial implications for

ground water resources available to future generations.

There are several key points to consider when addressing the issues raised in our 

overview of the two RIAs and developing systematic ground water evaluations for future RIAs

and other policy assessments. These key points are illustrated by our valuation framework

summarized in Figure 1 and Tables 1 and 2. An RIA must first assess the biophysical condition

of a ground water resource "with" and "without" the proposed policy change. It appears that the

RIA addressed effects where biophysical data were available and did not report potential effects

that could not be documented with available technology or data. More research is needed to

develop data bases and models to assess the effects of ground water policies on biophysical

changes in ground water resources (Boxes 1-7 in Figure 1). The next issue faced in conducting

an RIA is to identify how the policy-induced changes in the biophysical condition of a ground

water resource will change ground water service flows (Box 8, Figure 1). The two RIAs we

reviewed only accounted for a portion of the service flows suggested in Tables 1 and 2. Future

RIAs should identify potentially affected service flows that were considered and dismissed

because no effect was identified, or the identified effect was quite small, or there was no data to
43

quantify the effects. Both RIAs used several valuation methodologies (e.g., averting behavior,

contingent valuation, hedonic price), but are weak because value estimates can not be clearly

linked to specific biophysical changes in the ground water resources. The application of

economic value estimates in RIAs can be improved by precisely defining changes in ground

water service flows in terms that are relevant for economic analysis (using Figure 1, and Table 1

and 2 as a guide).

V. A STRUCTURE FOR CONSIDERING THE VALUE OF GROUND WATER

In this section, we discuss a general process or protocol for EPA offices to follow when

incorporating the economic value of ground water in RIAs. The overall goal of this protocol is

to generate and apply economic value estimates consistently across policy issues and offices

within EPA. Our valuation framework begins to develop the protocol for this consistency. In

addition, following the protocol may help EPA Offices to avoid duplication of efforts and

potential double-counting of values. For example, concise summaries of previous RIAs would

be available enabling future RIAs to explicitly build on the knowledge developed and experience

gained in conducting previous RIAs. This effort may be particularly fruitful for transferring

knowledge and information through time, across policy issues within EPA Offices, and across

offices within EPA.

Another useful application of our protocol is that it will provide information for building

EPA's Regulatory Impact Analysis (RIA) Benefit-Cost Database. Our protocol is different from

the RIA Benefit-Cost Database in that it provides guidelines for conducting and reporting benefit

assessments in RIAs. The RIA Benefit-Cost Database is a general reporting of all information
44

What are the contaminants?

 Geographic

Contaminant Concentration Extent

 

 

What are the potential

contaminants?

 

Geographic

Contaminant Concentration 

contained in RIAs. It probably is not practical to include all of the detailed information about

procedures used to assess ground water values in the RIA Benefit-Cost Database. We

recommend, however, that all of the information generated by our protocol be available to

supplement the RIA Benefit-Cost Database, and the Database include information about where

more detailed information regarding valuation procedures can be obtained.

Protocol Components 

The first component of our protocol is for the RIA analyst to record answers to the

following important questions.

Name of Proposed action? 

What is the current ground water condition?

____ Contaminated --->

____ Uncontaminated --->
45

What are the proposed policies or rules

 

What are the proposed policies or rules?

 

List of sources:

Source Contaminant

 

 

____Unknown

What is the proposed action?

____Protection --->

____Remediation --->

What are the sources of contamination?

 ____Known --->

 ____Unknown

What would the ground water condition be over the study time frame without any action

(reference condition)?

 Quantity Quality

Year 1 

Year 2 

Year 3 
46

 Etc. 

What would the ground water condition be over the study period with action (subsequent

condition)?

Quantity Quality

Year 1 

Year 2 

Year 3 

Etc. 
47

Answers to these questions relate to Boxes 1 - 7 in Figure 1 and comprise the technical data

necessary for estimation of benefits, Boxes 8 - 9. 

The next component of the protocol is to identify affected services that give rise to

benefit estimates. This issue relates to both the stock and surface water discharge functions

(Tables 1 and 2). Assessment of potential changes in services can be facilitated by completing

matrices such as those shown in Tables 5 and 6. These tables are partially filled out for a

hypothetical regulation. The first step in completing the tables is to assess the reference

condition for the services listed under each function in Tables 1 and 2. For example, affected

services for the stock function are documented in Table 5. The "Reference Conditions" indicate

that the aquifer provides an adequate supply of drinking water through public or private wells

and is uncontaminated. These quantity and quality dimensions are known with certainty. The

aquifer is not directly utilized for crop irrigation, livestock watering, or food processing services,

as indicated by the "no" entries in the second column of Table 5. To clarify interpretation of the

table all other entries for these services are left blank. Thus, the body of the table only

documents affected services. Completing the first column indicates that a service was

considered and purposely excluded. The information in the first column also briefly notes why a

potential service is excluded.

The entries for the discharge function in Table 6 indicate that the aquifer indirectly

provides water for crop irrigation and livestock watering, but surface water is not used for

human consumption. Again, quantity is assumed to be adequate, but the quality is threatened by

contaminated ground water. The extent and timing of the potential contamination is unknown. 
Table 5. Changes in Ground Water Services - Stock Function

Service

Reference Conditions Subsequent Conditions

Affected by Quantity Quality Uncertainty Quantity Quality Uncertainty

Proposed

Rule

(If no,

why?)

Contam- Concen- Increase Decrease No Increase Decrease No

ination tration Change Change

Drinking Yes Adequate None N/A None X Potential Extent and

Water for Decrease timing of

Current contamDemand ination

Crop No

Irrigation (No known

or anticipated use)

Livestock No

Watering (No known

or anticipated use)

Food No

Product (No known

Processing or anticipated use)

etc.
 Table 6. Changes in Ground Water Services - Discharge Function

Service

Reference Conditions Subsequent Conditions

Affected Quantity Quality Uncertainty Quantity Quality Uncertainty

by

Proposed

Rule

(If no,

why?)

Contam- Concent- Increase Decrease No Increase Decrease No

ination ration Change Change

Drinking No

Water (No

known or

anticipated use)

Crop Yes Adequate None N/A None X Potential Extent and

Irrigation for Decrease timing of

current contamdemand ination

Livestock Yes Adequate None N/A None X Potential Extent and

Watering for Decrease timing of

current contamdemand ination

Food No

Product

Processing

etc.
50

A starting point for assigning monetary values to changes in ground water services is an

assessment of available valuation data, e.g., the studies reported in Table 3. Available value

estimates would be graded as to their suitability for transfer to the current ground water

valuation issue. For discussions of criteria for selecting value estimates see the special issue of

Water Resources Research (Vol. 28, No. 3, 1992) dealing with benefits transfer. We do not

envision this process as being purely qualitative (e.g., good, average or poor), but dealing with

specific issues of how the available value estimates relate to the current situation being evaluated

in the RIA at hand. For example, are the same contaminants involved? Are the magnitudes of

contamination comparable? Were the valuation studies conducted adequately, e.g., are estimates

biased or have large variances?

As an example, suppose there is a potential decrease in the quality of drinking water

provided directly by the aquifer. This change is represented by an increase in the concentration

of Chemical Z of 30 ppb. As indicated in Table 7a, the proposed regulation will not affect the

quantity of ground water available for human consumption, and the aquifer is not directly used

for the other services listed in Table 5. The "Increment Evaluated" under "Quantity Changes" is

listed as "no effect" in Table 7a. The value columns for the quantity change, therefore, are left

blank to facilitate interpretation of the table. The increment of contamination to be evaluated is

documented under the"Quality Changes" heading in Table 7a. We assume that the water can be

made safe for drinking, but expenditures must be made on water purification. For our
51

 A number of Meta analyses of environmental values are being developed. These studies 8

could, if developed for ground water valuation (Boyle et al., 1994), can be a source of initial

value estimates for RIAs (Smith and Huang, 1993; Smith and Kaoru, 1990; Smith and Osborne,

1993; and Walsh et al., 1988).

hypothetical example we assume value data are not available to assign initial values to the

reduction in quality.8

Table 7a. Available Data for Valuing Changes in Ground Water Services - Stock Function

Services

Quantity Changes Quality Changes

Increment Value Valuation Increment Value Valuation

Evaluated Estimate(s) Method Evaluated Estimate(s) Method

Drinking No effect 30 ppb None Available N/A

Water Reduction

Crop No effect No effect

Irrigation

Livestock No effect No effect

Watering

Food No effect No effect

Product

Processing

Etc.

After assessing available data, additional data needs are identified. This covers services for

which available value estimates are not appropriate and services for which value estimates do not exist. 

Continuing with the example, value estimates are only needed for a reduction in water quality for
52

human consumption under the stock function. We identify averting cost as a minimum estimate and

contingent valuation as a procedure for estimating the full value the public places on avoiding potential

contamination . Values included in contingent valuation estimates, but excluded from averting costs,

include disutility from having to invest and maintain filtering systems for private wells and potential

nonuse values. The question mark in Table 7b indicates that the values remain to be estimated. After

the study is completed, the question mark would be replaced by the estimate(s).

Tables similar to 7a and 7b can be developed for the ground water recharge. We omit this step

here for expositional convenience.

The final step is to identify services that will not be monetized including the reasons for not

monetizing them (Table 8). In this simplistic example, we assume a 50% chance of a 30 ppb level of

contamination. We further assume that all effects are monetorized. The expected change can be

monetorized in some instances using appropriate measures of economic value under uncertainty (e.g.,

option price described previously).

Table 7b. Needed Data for Valuing Changes in Ground Water Services - Stock Function

Service

Quantity Changes Quality Changes

Increment Desired Value Increment Desired Value

Evaluated Valuation Estimates Evaluated Valuation Estimates

Method Method

Drinking No effect 30 ppb Contingent ?

Water Reduction valuation or

averted cost

Crop No effect No effect

Irrigation

Livestock No effect No effect

Watering

Food No effect No effect

Product

Processing
53

Table 8. Other Valuation Considerations for Changes in Ground Water Services - Stock Function

Services Nonmonetorized Effects Treatment of Uncertainty Sensitivity Analyses

(Reason Why)

Drinking Water None 50% chance of Geographical extent of

contamination contamination

Crop Irrigation None

Livestock Watering None

Food Product Processing None

 However, in some cases this will not be possible. In such instances, sensitivity analyses conducted

with plausible value estimates can be utilized to consider the effect of the uncertainty on the outcome of

the entire benefit-cost or cost-effectiveness analysis. Another source of uncertainty in the current

example is the geographical extent of the contamination. It is assumed that this factor is not known and

can not be accurately predicted. Thus, several scenarios of damages might be investigated to consider

the impact on aggregate value estimates.

VI. CONCLUDING COMMENTS

Preparing an RIA that adequately considers the full range of effects of a proposed ground water

regulation is a major undertaking. Benefit estimation can be facilitated by carefully identifying,

measuring, and documenting the linkages and "chain of events" shown in Figure 1, using Tables 1 and 2

as guides for tracing specific linkages between policies, changes in ground water services and value

estimates. These tables guide identification and quantification of linkages between a proposed

regulation, changes in services provided by ground water functions, and the effects of service changes

on economic activities and values. This information reveals the gainers and losers of a proposed
54

regulation, over both time and geographic space. Using Table 5, 6, 7a, 7b and 8 will facilitate clear and

concise documentation of valuation analyses for RIAs. This documentation will report service effects

valued as well as those dismissed as not relevant. It will also insure all RIAs considering ground water

values begin at the same starting point, consider the same issues and provide uniform reporting. 

Establishing structure and consistency within and across EPA offices is important for producing

accurate benefit estimates, avoiding double-counting problems, and eliminating duplication of ground

water valuation efforts.

We envision these tables as comprising a concise form for reporting all benefit analyses

conducted for RIAs. The list of questions would comprise a cover sheet to identify the RIA and ground

water issue. Each of the tables would then follow to complete the documentation. This reporting

framework would provide a systematic way of documenting and reviewing RIA benefit analyses. It

may also be helpful to document studies used as secondary sources of value data as has been done by

Boyle (1994) for ground water contingent-valuation studies, and we abbreviated in Tables 3 and 4.
55

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