Groundwater Values from Avoidance Cost Studies: Implications for Policy and Future
Research
Author(s): Charles W. Abdalla
Source: American Journal of Agricultural Economics , Dec., 1994, Vol. 76, No. 5,
Proceedings Issue (Dec., 1994), pp. 1062-1067
Published by: Oxford University Press on behalf of the Agricultural & Applied
Economics Association
Stable URL: https://www.jstor.org/stable/1243392
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Groundwater Values from Avoidance
Cost Studies: Implications for Policy
and Future Research
Charles W. Abdalla
Groundwater protection policies can havelow
sig-levels of contaminants may lead to chroni
illnesses, such as cancer or death. Groundwater
nificant economic consequences for individuals, businesses, and communities. Since marcontamination can result in morbidity losses,
kets provide insufficient value information such as the costs of medical treatment.
about groundwater services, methods have been 2. Increased Fear and Anxiety. The level of
developed to measure groundwater protection
anxiety and fear within a community may inbenefits. One technique, the avoidance cost crease when groundwater contamination ocmethod (ACM), offers a means for generating
curs. This may be especially true if there is
lower-bound estimates of an important compogreat uncertainty about exposure or its effects.
nent of benefits, namely use of groundwater as 3. Avoidance Cost and Property Value Loss.
Groundwater contamination creates avoidance
a drinking water source, yet few applications
have been completed. This is unfortunate since
costs for municipal governments, such as
the intuition behind avoidance costs and meamonitoring and securing alternate water supplies. Households and businesses may incur
surement procedures is more accessible to
noneconomists compared to other valuation costs, known as averting or defensive expendimethods. Thus, results are more likely to be tures, to avoid or mitigate damages from conused in policy making. This paper reviews the taminant exposure. While not identified by
major categories of groundwater protection Spofford, Krupnick, and Wood, concern about
benefits, summarizes the results of ACM
groundwater quality at a residential or commer-
cial site may reduce its property value.
groundwater studies, discusses their implica4. Ecological Damage and Loss of Recretions for policy and research, and makes
observations about the role of economics in this
ational Use. Since underground waters discharge into surface water, the potential exists
policy area.
for damage to ecological resources, such as fish
and wildlife habitat. If contaminant levels
Groundwater Contamination Damage
threaten the quantity or quality of these
sources, loss of recreational benefits can also
occur.
From a public decision-making standpoint, the
5. Reduction/Loss of Nonuse Values.
benefits of groundwater protection can be
viewed as damage avoided from groundwater contamination may reduce nonuser be
contamination. The major categories of damage groundwater, such as option value an
as identified by Spofford, Krupnick, and Wood ence or bequest value.
are as follows:
1. Human Health Effects. Exposure to unsafe
levels of substances in water can lead to in-
Groundwater Valuation Research
creased mortality or morbidity. Contaminant
Our
current knowledge about the economic
levels are rarely high enough to produce
acute
value
of groundwater impacts is quite limited.
health impacts. Rather, consuming water
with
The bulk of the research conducted to date has
Charles W. Abdalla is associate professor in the Department of Agricultural Economics and Rural Sociology, The Pennsylvania State
University.
focused on groundwater as a drinking water
source, which relates to human health effects,
fear and anxiety, and avoidance costs. Most
Amer. J. Agr. Econ. 76 (December 1994): 1062-1067
Copyright 1994 American Agricultural Economics Association
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Abdalla Groundwater Values from Avoidance Cost Studies 1063
forconducted
the environmental quality change.
property value studies havestitute
been
The theoretical
basis
for the averting expendinear waste disposal sites where
it is not
clear
tures
approach,
which
is rooted in the housethat groundwater quality is the factor affecting
hold production
function model, is contained in
values (Smith 1993). No study
has addressed
Courant and impacts.
Porter; and Bartik. Most analyses
ecological damages or recreational
have concluded
that observed
The contingent valuation method
(CVM)
has averting costs
been used to estimate nonuse values and use
provide a lower bound to willingness-to-pay
(WTP). One key assumption underlying this revalues for groundwater. The results are summasult is that averting actions perfectly substitute
rized by Boyle.
for pollution reductions.
Case Studies Addressing Benefits and Cost
Empirical Studies
Several studies have analyzed both benefits and
At least five studies have attempted to use the
costs of groundwater contamination episodes.
ACM
Raucher compared the benefits and costs
of approach to measure household-level
costs associated with groundwater contaminapollution source containment (prevention),
tion. Smith and Desvousges found in a sample
monitoring, and remedial action at three Florida
taken in the Boston area that bottled water and
Superfund sites. He concluded that the efficien-
water filters were purchased for the sole purcy of different policies is highly site specific
pose of avoiding hazardous waste by 30% and
and that, in some cases, the benefits of prevent-
7% of households, respectively. Losses due to
ing contamination may not exceed the costs.
water quality degradation were not estimated,
Sarnat, Willis, and Harper found the "do nothsince they lacked detailed data on
ing" option to address EDB and aldicarbhowever,
in
household averting behaviors and their costs.
residential wells in Massachusetts to be preferAbdalla, and Abdalla, Roach, and Epp docuable, based on economic criteria, to connecting
mented averting expenditures of households
to a nearby public system, building a water system, and home treatment.
served by public water systems in two Pennsyl-
vania communities that had organic chemicals
in their water supplies. At a central Pennsyl-
vania site, 96% of households were aware of
Avoidance Cost Studies
water contamination and 76% of those with
such knowledge undertook averting behavior
Studies of avoidance costs incurred by
Only 43% of households in the southeast site
municipalities have generally focused on the
capital and operating costs associated with were
wa- aware of contamination. Of those, 44%
ter treatment. Such costs are highly dependent
undertook avoidance actions. Costs averaged
$252 and $123 for each household that chose to
upon the population served. For example,
Nielson and Lee calculated annual pesticideavoid
re- the
moval costs of between $333 and $67 per
contaminant in the central and south-
east study sites, respectively.
Powell documented household bottled water
household for water systems serving 5,000 and
500,000 customers, respectively.
expenditures as part of a CVM study of groundLittle published research exists that docu- water benefits in eight "clean" and seven "con-
ments the effect of reduced groundwater quality taminated" communities in Massachusetts, New
on the commercial sector. Results of an assess-
York, and Pennsylvania. Despite the fact that
ment in Minnesota suggest that such costsalmost
may half of the communities had recent
contamination problems, only 16% of mail su
be significant (Freshwater Foundation). Findvey
ings from household-level ACM studies are
de-respondents indicated that their water h
scribed in greater detail in the next section.been contaminated. For those that were aware,
Household Avoidance Costs
At the household level, the ACM is
the average household bottled water expenditure was $32 per year, about three times that
spent in uncontaminated areas. Respondents
aware of contamination were willing to pay $82
per year for increased water supply protection
operationalized by estimating the costs of
compared to $56 for those that were not.
behaviors to prevent or mitigate adverse im- Households relying on private wells were willpacts of pollution. It infers benefits by measur- ing to pay $14 per year more for protection
ing consumption of goods or services that sub-than those served by public systems.
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1064 December 1994 Amer J. Agr. Econ.
Collins and Steinback documented
nual costsresponses
for expenditures on bottled water to
to knowledge of water contamination
of rural
address organic
contamination alone ranged
households relying on individual
in West
fromwells
$32 to $330
per year. Little published reVirginia. Eighty-five percent ofsearch
those
who were
is available
regarding the magnitude of
informed about their household's contamination
avoidance losses to businesses. Measurement of
problem were found to engage in averting ac-municipal losses has been generally confined to
treatment costs. Avoidance costs should not be
tivities. The most frequent actions were: clean-
ing and repairing water systems, hauling water, double-counted when analyzing a policy option. For example, if municipal treatment elimiphone surveys was used to compute a weighted
nates the need for household protective actions,
and treatment. Information from mail and tele-
average economic avoidance cost of $320, the costs of household averting losses should be
$357, and $1,090 for households with bacteria,
excluded from the analysis.
minerals, and organic contamination problems,
respectively.
Avoidance Costs are Situation Dependent
The ACM studies reviewed here provide additional support for the notion that groundwater
Findings from the empirical applications ofprotection benefits are quite dependent on local
ACM method are relevant to public policy deciconditions, as suggested by Raucher. While
sions about groundwater management.
some of this variation may be due to differImplications for Policy
ences in methods, the contaminant and its
health risks, type of water supply, cost of avert-
ing actions, household and community characteristics appear to be important factors
Available evidence suggests that households do
influencing averting costs. For instance, houseundertake expenditures to avoid exposure toholds with individual water supplies were
groundwater contaminants in their drinking wafound to spend more on averting actions than
ter. Most of this evidence comes from studies
those served by public systems. Individual well
of households on public water systems conowners may invest in more expensive solutions
taminated by organic chemicals from industrialsince they are responsible for ensuring the
type sources. Since households are likelyquality
to
of their water. Community factors that
perceive pesticides to be somewhat similar
to to influence avoidance costs include the
appear
organic chemicals, averting expenditures
extent
are of public notification and confidence in
likely to result when pesticide contamination
theof
local water supplier. Household-level factors that influenced the likelihood that a housegroundwater occurs. Thus, policy makers
should consider household averting costs in de-hold would avert include qualitative rating of
cisions about pesticide use. Due to the limitedthe contaminant's health risk, amount of
population susceptible to nitrate health risks,information acquired about the contaminant or
the situation for nitrates is much different. Curits health risk, and presence of children
rently, there is little documented evidence of
(Abdalla and Rodriguez). Given the importance
of these site-specific factors, policy makers
household averting losses due to high nitrate
should refrain from generalizing about losses
levels in groundwater. Municipal and commerand be very cautious in attempting to transfer
cial expenditures can be significant, but these
Averting Expenditures Exist
costs only are incurred when state or local gov-results to other contamination settings.
ernment agencies force public water suppliers
to meet safe drinking water standards.
Combining Avoidance Costs with Other Values
Avoidance Costs Can Be Significant
The benefits of groundwater protection include
much more than avoidance costs incurred by
municipalities, businesses, and households. As
Avoidance actions taken by households, firms,
noted, estimates from household studies underand governments in response to groundwater
state the true willingness to pay for an environcontamination can have significant economic
mental improvement, in this case the value of
consequences. Annual costs from the household
averting expenditure studies reviewed generallygroundwater as a drinking water source. Information about the full benefits should be obranged from $125 to $330 per household. An-
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Abdalla Groundwater Values from Avoidance Cost Studies 1065
where the
information base
is thinnest, such as
tained through other valuation
methods.
There
is some evidence that values from CVM meth-
in the case of nitrate contamination. An impor-
ods are related in a systematic way to housetant community factor that needs further
investigation is the role of public versus private
hold averting expenditures (Powell). If future
research documents this relationship, the utility
water supply provision.
of averting loss estimates in groundwater
policy making could be significantly enhanced.
Also, if reductions in property values are found Combining Avoidance Costs with Other
to accurately reflect perceptions of the health-Methods
fulness of households' water supply, results
from hedonic price studies should approximate Another avenue for research lies in conducting
averting cost studies. Therefore, in most cases,ACM studies in conjunction with other valuathey should not be added to household avoid- tion methods. The ACM is capable of generatance losses.
ing lower-bound estimates of an important catThe ACM does not capture other potentially
egory of groundwater benefits. These values
important loss categories, such as ecological
have the advantage of being based upon actual
damages or nonuse values. Despite these limits,
household or firm decisions made under budget
results from ACM studies are an important constraints.
part
In future studies, household avert-
of the information needed for policy making.
ing expenditures could be used as an "anchor"
within a CVM hypothetical choice framework.
groundwater protection, they can beThe
used
as an
result
may be an improved valuation
initial "screening" step in comparing
benefits A second research opportunity
methodology.
and costs of protection alternatives and
in helpwould
be to compare ACM results with the
As a lower-bound estimate of benefits of
ing to decide if more in-depth valuation
efforts
findings
from property value studies.
are needed.
Implications for Future Research
Costs of Groundwater Protection Policies
Most academic research has been focused on
the benefits of groundwater protection. Muc
Since avoidance costs have received relatively
less attention from academic researchers than
less work has been done on the costs of polici
other methods, there are a number of important
to protect groundwater. A predominant view
point among economists has been that the cos
opportunities for future research.
of environmental policies are easily measured
Freeman argues that this view overlooks the
symmetry between benefits and costs as
Avoidance Costs
changes in utilities and the reality of how poliaffect individuals' welfare. He concludes
Research is needed to refine the theory andcies
find
better ways of empirically operationalizing
that
the
proper measurement of costs of policies in-
volves
approach. One important applied research
area similar issues to benefits and may be
is the validity of key assumptions underlying
just as challenging. Given the diversity of the
groundwater resource, its uses and associated
the ACM method. Future studies should attempt
to verify the extent to which the assumptions,
values, as well as the available policy responssuch as perfect substitutability of averting
es, the outcome of benefit-cost comparisons are
likely
to vary by locale. More information is
activities for environmental quality changes,
do
or do not hold in the groundwater contaminaneeded about the cost of other policy aption context. A key question concerns what
proaches, such as special protection areas (e.g.,
well-head
or aquifer protection districts), behouseholds believe they are buying when
unyond the waste management context. Informadertaking averting actions (Freeman). In future
studies, respondents could be asked about
tion and experiences from waste policies may
expected benefits of averting actions. Also, itnot be applicable to control of diffuse nonpoint
may be useful to measure the effect of more ac- pollution sources.
curate information upon averting decisions.
When groundwater emerged as a priority isA second research opportunity is to investi-sue in the mid 1980s, information on the funcgate the effect of local context variables on the
tions and values of groundwater was badly
nature and magnitude of avoidance costs. In needed by policy makers. As the issue has
evolved and as programs have been impleparticular, research is needed on variables
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1066
December
1994
Amer.
J.
Agr.
Econ.
mented, the demand for cost information,
procedures used to estimate such values, are
especially at the state and local level, has ingenerally more easily understood by noneconomists than other valuation methods. Conse-
creased.
quently, results from ACM studies tend to be
more readily received and used by policy mak
ers. This may be even more true in the future a
Observations About the Role of Economics in
Groundwater Policy
the locus for groundwater decision moves to
the local level. Given the likelihood of contin-
ued interest in ACM findings, economists need
Two related factors, benefit/cost compartmendevote more effort to advancing theoretical
talization and specialization in valuation to
methand inempirical knowledge about avoidance
ods, appear to work against more effective
volvement of economists and use of their re-
costs.
search findings in groundwater policy making.
Some impact categories have received much
more attention from economists than others.
References
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