Why do an economic analysis?

• Estimating expenditures to abate pollution• Assessing alternatives for multiple objectives• Determining how costs of abatement should be

allocated• Evaluating the trade off between preservation and

development of new natural resources • Comparing short-term costs and long-term

benefits of protecting natural resources

Economic Concept of Value

• Maximizing human welfare - anthropocentric• Substitutability - trade off

Framework for Economic Analysis

• Economic considerations• Equity considerations• Intergenerational effects• Sustainability of resource systems• Social risk aversion

» Economic analysis is used to help organize available information

» Economic analysis should not be the sole determinant of choices

Economic Analysis for Water Resources: Legal Background• The Clean Water Act

“Maximum extent practicable”

Feasibility

Efficiency

Economic efficiency• Stormwater Management

Professional judgement

Cost effectiveness

Types of Economic Analysis

• Cost effectiveness

At treatment site

At receiving water

• Comparison of benefits and costsBenefit cost ratio

Net benefit

Benefit Cost Analysis Background

• 1950s: Corp of Engineers pubic works projects

• 1960s: Growing awareness for public health, safety, and the environment

National Environmental Policy Act of 1969 (NEPA)

• 1970s: Clean Water Act

• 1980s: Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)

Principal and guidelines

• 1990s: Oil Pollution Act

Costs for nonpoint source pollution abatement

• Capital costs

• Operation and maintenance

• Monitoring

What are the benefits of nature?

• Source of material input to the economy

• Life support

• Amenity services

• Disposal of byproducts from economic activities

How do we estimate environmental

benefits?Methods are classified based on two

characteristics:

• Observed vs. hypothetical

• Direct vs. indirect

Observed direct valuation method

• Referendum voting

• Simulated markets

Observed indirect valuation method

• Travel cost method

• Hedonic method

• Cost of illness approach

Hypothetical direct valuation method

Contingent valuation method:

• Bidding game

• Open ended questions

Hypothetical indirect valuation method

• Referendum approach

• Contingent ranking

Benefit Transfer

• Using results from existing studies for new application

• Resources are limited

• Large base of empirical studies exist

Valuation Method

Identify Beneficial Uses

Identify Relevant Pollutants

Estimate Unimpaired Value

Develop Relationship between Beneficial Uses and Pollutants

Estimate Change in Beneficial Uses

BMP Benefit Value

Pollutant Conc. Threshold

Existing Pollutant Conc.

Pollutants Conc. with BMP

Pollutants Removal Efficiency

BMP CostBenefit and Cost

Comparison

Feasible BMPsReceiving Water Properties

Beneficial Uses and Pollutant Concentration Relationship

1

0

Ben

efit

Val

ue

Mul

tiplie

r (M

p)

Concentration (mg/L)

Unimpaired Use

Eliminated Use

Cp

Mp

BENbmp = BENunimpaired*Mp

Beneficial Uses and Pollutant Concentration Relationship

• Limited information!!!!

• Variability of pollutants concentration

• Distinguishing between the effects of stormwater pollutants and other environmental conditions

Benefit and Cost Comparison of Available BMPs

Cost of BMP

Benefit of BMP

$

Treatment Level(1) Min (2) (3) (4) Max

Study of Ballona Creek

Orit Wilchfort

Jay R. Lund

Dan Lew

Doug Larson

Department of Civil and Environmental Engineering

Department of Agricultural and Resource Economics

University of California, Davis

Best Management Practices

• Level 1: Detention and Screening

• Level 2: Filtration with Disinfection

• Level 3: Advanced Treatment -

Reverse Osmosis

Results(Single Agency Treatment Only)

15,062

17,116

24,873

20 36 38

Level 1 Level 2 Level 3

$100

0/ye

ar

Results(Basinwide Treatment)

168,166

262,170

418,672

1,492 1,613 1,644

Level 1 Level 2 Level 3

$100

0/ye

ar

The Value and Limitations of Economic Analysis

• BCA is useful in assessing and solving stormwater problems

• Provides grounds for learning about the watershed and the impacts of nonpoint source pollution on the receiving waters

• Supports discussion of possible management solutions

• Examines different levels of management options that may lead to economically favorable decisions for water quality management

• Regional treatment of stormwater provides greater benefits than single agency treatment

• Economic analysis should be part of nonpoint source management but should not be the only basis for decision making.