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Water: Economics

Interim Economic Guidance for Water Quality Standards: Appendix C

Conceptual Measures of Economic Benefits

In valuing benefits associated with an ecological resource such as clean water, a basic distinction is made between the intrinsic value of the existence of the resource and its value in use by the human population. Use values are further subdivided into direct or indirect uses. Other valuation concepts arise from the uncertainty surrounding future uses and availability of the resource. A classification of these valuation concepts, along with examples, is presented in Table C-1.

C.1 Use Benefits

Estimating the benefits of clean water will depend upon several variables that describe the attributes of the resource and its uses. A waterbody might be used for recreational activities (such as fishing, boating, swimming, hunting, bird watching), for commercial purposes (such as industrial water supply, irrigation, municipal drinking water, and fish harvesting), or for both. Where recreational activities are created or enhanced due to water quality improvements, the public will benefit in the form of increased recreational opportunities. Similarly, the cost of treating irrigation and drinking water to down stream users could be reduced if pollutant discharges were reduced or eliminated in a particular stretch of river.

Direct use includes both consumptive and non-consumptive uses. Consumptive uses can be distinguished from non-consumptive uses in that the former excludes other uses of the same resource while the latter does not. For example, water is consumed when it is diverted from a waterbody for irrigation purposes. With non-consumptive uses, however, the resource base remains in the same state before and after use (e.g., swimming). Human health benefits associated with cleaner water could be consumptive (reduced illness from eating finfish or shellfish) or non-consumptive (reduced exposure to infectious diseases while recreating).

When estimating benefits, it is important to determine whether or not the resource and its uses (in this case clean water) can be considered market or non-market resources and uses (i.e., does a market exist for the resource or its use). For example, commercial fisheries have a market value reflected by the financial value of landings of a particular species. By contrast, no market exists to describe the value individuals receive from swimming. Where market values are available, they should be used to estimate benefits. In the case of water supply, there may or may not be a market for clean water. Some water users may be required to pay for that use as in the case of a farmer paying a regional water board to divert water for irrigation purposes. This will be particularly true in the arid west. By contrast, a manufacturing facility using water for cooling or process water may not pay anything for the right to pump and use water from an adjacent river. For resources with no market value, a number of estimation techniques including the travel cost, estimation from similar markets, and contingent valuation methods have been developed.

While they are conceptually distinct attributes, consumptive use is frequently associated with markets and non-consumptive use is frequently associated with non-market situations. Some resources that are considered market resources, however, may be used non-consumptively. The converse is also true. As an example of the first, a fee may be charged (other than parking) to gain entrance to a state park, however, while a swimmer's use of a lake in the park is not consuming any part of the lake.

Commercial activities that are dependent on clean water which is not directly owned are said to benefit from indirect use. Examples would be a fishing equipment manufacturer's dependence on healthy fish stocks to induce demand for its products or the dependence of property values on the pristine condition of an adjacent water body. Indirect use is also characterized by the scenic views and water enhanced recreational opportunities (camping, picnicking, birdwatching) associated with the quality of water in a water body. Indirect use benefits such as enhanced property values can be estimated using the hedonic price technique. Care should be taken, however, to not double-count benefits. If property values reflect the proximity to and thus use of water, then the value of the use should not be included separately.

C.2 Intrinsic Benefits

Intrinsic benefits include all benefits associated with a resource that are not directly related to the current use of the resource. Intrinsic benefits are represented by the sum of existence and option values. Existence value indicates an individual's (and society's) willingness to pay to maintain an ecological resource such as clean water for its own sake, regardless of any perceived or potential opportunity for that individual to use the water body now or in the future. Contributions of money to save endangered species such as the snail darter demonstrate a willingness to pay for the existence of an environmental amenity despite the fact that the contributors may never use it or even experience it directly.

Option value is the willingness to pay for having a future opportunity to use resources such as clean water in known or as yet unknown ways. In a sense it is a combination of insurance and speculative value. Individuals routinely pay to store or transport something they are not sure they will use in the future because they recognize it would be more costly to recreate the item than to preserve it. In an ecological sense, pristine habitats and wildlife refuges are often preserved under the assumption that plant or animal species which may yield pharmaceutical, genetic, or ecosystem benefits are yet to be discovered. Option value takes on particular importance when proposed development or environmental perturbations are largely irreversible or pollutants are persistent. Intrinsic benefits are difficult to measure due to the level of uncertainty associated with these benefits. The most common approach to estimating intrinsic benefits, however, is the contingent valuation method, which cannot be described in detail within this short overview.

C.3 Summary

Total valuation of clean water benefits includes all use and existence values as well as option value. The proper framework for estimating the economic benefits associated with clean water consists of 1) determining when damage first occurs or would occur; 2) identifying and quantifying the potential physical/biological damages relative to an appropriate baseline; 3) identifying all affected individuals both due to potential loss of direct or indirect services or uses, and to potential losses attributable to existence values (may include projections for growth in participation rates); 4) estimating the value affected individuals place on clean water prior to potential degradation; and 5) determining the time horizon over which the waterbody would be degraded or restored to some maximum reduced state of service (if ever), and appropriately discounting the stream of potential lost services. If evaluating an improvement in water quality, the procedures are the same except that benefits gained are measured.

Table C-1: Categories of Use Benefits
Direct Indirect Intrinsic

Market Benefits

  • Industrial Water Supply
  • Agricultural Water Supply
  • Municipal Water Supply
  • Commercial Fishing

Non-Market Benefits

  • Recreational Fishing
  • Hunting
  • Industrial Water Supply
  • Agricultural Water Supply
  • Municipal Water Supply
  • Fishing Equipment Manufacturer
  • Property Values
  • Aesthetics (scenic views, water enhanced recreation)
  • Option Value (access to resource in future)
  • Existence Value (knowledge that services of resource exist)
  • Swimming
  • Boating
  • Human Health

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