Table Of ContentSTUDIES IN U R B AN ECONOMICS
Under the Editorship of
Edwin S. Mills
Princeton University
Norman J. Glickman. ECONOMETRIC ANALYSIS OF REGIONAL SYS
TEMS: Explorations in Model Building and Policy Analysis
J. Vernon Henderson. ECONOMIC THEORY AND THE CITIES
Norman J. Glickman. THE GROWTH AND MANAGEMENT OF THE
JAPANESE URBAN SYSTEM
George S. Tolley, Philip E. Graves, and John L. Gardner, URBAN GROWTH
POLICY IN A MARKET ECONOMY
David Segal (Ed.). THE ECONOMICS OF NEIGHBORHOOD
R. D. Norton. CITY LIFE-CYCLES AND AMERICAN URBAN POLICY
John F. McDonald. ECONOMIC ANALYSIS OF AN URBAN
HOUSING MARKET
Daniel Feenberg and Edwin S. Mills. MEASURING THE BENEFITS OF
WATER POLLUTION ABATEMENT
Measuring the Benefits of
Water Pollution Abatement
DANIEL FEENBERG
National Bureau of Economic Research
Cambridge, Massachusetts
EDWIN S. MILLS
Department of Economics
Princeton University
Princeton, New Jersey
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Library of Congress Cataloging in Publication Data
Feenberg, Daniel.
Measuring the benefits of water pollution abatement.
(Studies in urban economics)
Bibliography: p.
Includes index.
1. Water quality management—Cost effectiveness.
I. Mills, EdwinS. Joint author. II. Title.
III. Series.
TD365.F44 363.7'3945 80-15388
ISBN 0-12-250950-1
PRINTED IN THE UNITED STATES OF AMERICA
80 81 82 83 9 8 7 6 5 4 3 2 1
Preface
Although this book is about techniques for measuring the benefits of
water pollution abatement, almost all the applications and procedures
used are equally applicable to air pollution.
An introductory chapter sets the stage for the analysis. Chapter 2 pre
sents a review of basic welfare economics. Chapter 3 derives social bene
fit measures from theoretical welfare concepts. Chapters 4 and 5 present
our basic theoretical contributions in measuring instream benefits of
water quality improvement. It is in this context that the public good aspect
of pollution is most clear. Chapter 6 presents the theory of withdrawal
benefits of water quality improvement. (Most of the basic theoretical
contributions in this book are Daniel Feenberg's and are taken from his
dissertation.) Chapters 7 and 8 present empirical studies of instream and
withdrawal benefits. Chapter 9 critically reviews ongoing studies of the
benefits of the national water pollution abatement program and presents
new estimates. Chapter 10 presents concluding comments.
The book deals with basic theoretical and applied welfare economics.
Readers should have a thorough command of elementary microeconomics.
Some of the discussion is technical, but we have limited the advanced
mathematics to Chapter 5 and some appendices. The rest of the book can
be read by anyone with a knowledge of elementary calculus. Chapter 5
and the appendices require an understanding of more advanced mathe
matics, and except for these parts, the book can be used as supplementary
reading in undergraduate environmental economics courses.
Water pollution analysis is not intrinsically urban: Pollution is restricted
to neither urban nor rural areas. However, almost all the emprical research
reported in this book is urban. The single most elaborate empirical study
ix
χ Preface
is the travel cost study of recreational benefits reported in Chapter 7. That
application is entirely urban. In fact, recreational benefits of water pol
lution abatement are almost entirely an urban subject, not only because
most people are urban but also because urban lakes and streams are more
polluted than rural lakes and streams. All of the analysis in Chapter 8 is
urban. Thus, the empirical parts of the book can be viewed as studies in
applied urban economics.
Many people helped to prepare this volume. Most of the research was
financed by a grant from the Environmental Protection Agency (EPA)
to Princeton University. We are deeply indebted to Alan Carlin, project
manager for EPA, for his insights, criticisms, and patience. Some financ
ing was also provided by a grant from the Sloan Foundation to the Prince
ton University Economics Department. A. My rick Freeman read a draft
of the entire manuscript and made valuable suggestions. Richard Price
worked as research assistant in many parts of the project, and was espe
cially helpful with material on withdrawal benefits. Jee Peng Tan worked
as research assistant on the withdrawal study in Chapter 8.
1
Introduction
1. Scope and Background
This book is about measuring the benefits of water pollution abatement.
Thus, it is about the benefit side of the benefit-cost calculus. Benefit-
cost analysis is part of welfare economics and is a complex and highly
developed specialty with almost a century of intellectual history.
Although the subject is complex, the important ideas are accessible to and
usable by practitioners whose efforts are devoted to the analysis of
serious project proposals. The intent of this book is to show that a college
graduate with a rudimentary knowledge of economics, patience to work
through the material in the book, and a willingness to analyze numerical
data can do useful and professionally respectable benefit calculations. It
is, however, important to keep one's wits about one. It is also important
to know when to seek expert assistance.
The book starts with discussion of the most abstract and fundamental
notions and proceeds to the most practical problems of data collection
and analysis.At each step, the goal is to provide practical guides to analy
sis. But benefit-cost analysis is not a subject that can be learned like a
recipe in a cookbook. It can be done well only if one knows what various
courses of action imply about deeper issues and if one keeps in mind the
underlying goal of the analysis.
It is discouraging that benefit-cost analysis continues to be controver
sial. At its most fundamental level, benefit-cost analysis is simply a set of
techniques for choosing among actions to achieve well-defined goals. The
basic ideas apply regardless of whether the project is government or pri-
1
2 Introduction
vate, environmental, military, or in any other subject area. Any project
that is worth considering must provide benefits to those undertaking the
project or, in the case of government projects, to those on whose behalf
the project is undertaken. A project without benefits cannot be worth un
dertaking. Likewise, all projects require productive resources that have
alternative uses. Environmental projects usually require workers, manag
ers, capital equipment, and raw materials that could be employed in other
useful ways if the project was not undertaken. Indeed, a project that used
resources with no alternative uses would be a perfect counterexample to
the economists' adage, "There are no free lunches." The value of what
must be foregone to use the resources on an environmental project consti
tutes the cost of the project. The economists' most important contribution
to cost measurement involves showing that competitive market prices of
resources are the correct measures of the opportunity cost of using the
resources on an environmental project. The final step in benefit-cost
analysis consists of the notion that a project should be judged by striking a
balance between its benefits and costs. If a project's benefits are less than
its costs, it means that the resource required for it would be better em
ployed elsewhere.
At the level of the abstract outline in the previous paragraph,
benefit-cost analysis is hardly controversial. But accepting that outline
does not commit one to a view as to how benefits are to be measured,
whose benefits are to be counted and with what weights, what discount
rate is to be used in valuing future benefits, how unemployed resources
are to be treated, and so forth. Some of these issues are indeed controver
sial. We shall discuss each controversial issue in benefit measurement as
we proceed step-by-step through the analysis. We shall show that some
controversies and objections to economists' procedures are misconcep
tions that are of no concern if the analysis is done carefully. On other
issues no definitive conclusion can be drawn and judgment must be used.
On still other issues the correct procedure depends on exactly what the
goals of the analysis are. On such issues the analysis will provide a guide
book: If the goal is such-and-such, proceed this way; but if the goal is dif
ferent, proceed another way.
Although benefit-cost analysis should not be controversial at the most
fundamental level, there can be no doubt that benefit calculations are
more controversial than cost calculations. The notion that market prices
of resources are appropriate in computing project costs is intuitive and
relatively uncontroversial. But benefit measurement is much less intu
itive. Many people find it hard to escape the notion that economists' ben
efit measurements decide for people what is best for them, or make arbi
trary judgments about what is good for people, or ignore the judgments of
1. Scope and Background 3
elected officials whose job it is to know what people want. Some people
believe that benefit calculations ignore or undervalue noneconomic and
unmeasurable benefits of government projects. Economists have of
course sometimes been guilty of these and other sins. Our goal is not to
defend what economists have done or what others have justified in the
name of sound economics. In fact, much benefit analysis has been of
extremely low quality. Instead, the purpose is to show how to do benefit
analysis carefully, so that it can produce useful results. It would be false
advertising to claim that careful benefit analysis is easy. It is not. But the
intent of this book is to take the mystery out of it and to convince the
reader that the tools are practical and usable.
The basic ideas of welfare economics, of benefit measurement, and of
government intervention to avoid resource misallocation from environ
mental pollution go back to the last decade of the nineteenth and the first
two decades of the twentieth century. Almost all the important early ideas
are in the writings of Marshall [31] and Pigou [40], the two great Cam
bridge economists. Marshall introduced the notion of consumer surplus,
the basic tool of benefit measurement. Pigou studied market failure in ex
ternal economies and diseconomies and measured the benefits of govern
ment intervention. From then until now, these basic ideas have been re
fined, extended, and generalized in hundreds of scholarly books and
papers. Especially since World War II, the use of mathematics and other
tools of careful theorizing has made it possible to clarify ideas and to de
cide exactly what could or could not be derived from a given set of as
sumptions. It is now possible to place the entire subject in a unified and
systematic framework that was incomplete until the early 1970s.
Although a coherent body of theoretical tools is now available, there
are still disturbingly few high-quality empirical studies of benefit measure
ment available. The situation is unfortunate because there is inevitably a
gap between even the most practical theoretical studies and empirical ap
plications. Empirical research in economics is partly science and partly
art. In some degree, one must learn to do empirical work by reading ear
lier high-quality studies. One reason that only few high-quality empirical
benefit studies are available is simply that few people have tried. A sec
ond reason is that, as is also true in other applied areas, requisite data are
scarce. Data requirements for environmental benefit studies are not too
great, but much better estimates of benefits can be made if samples of
certain related data are available. Such data have rarely been collected in
sufficiently coherent fashion to make it easy to estimate benefits. An im
portant purpose of this book is to show what kinds of data are needed or
valuable in adequate benefit estimates, how to use the data, and how to
improvise in their absence.
4 Introduction
2. Discharges and Ambient Environmental Quality
A complex and highly developed industrial economy like that of the
United States requires the removal of massive amounts of materials from
the environment. The Council on Environmental Quality (CEQ)
[12, 1970] estimated that some 4.3 billion tons of materials were removed
from the environment in 1969, about 120 pounds per capita per day. The
figure is undoubtedly much larger today, although no more recent esti
mates appear to be available. Most of this material is removed from the
surface or crust of the earth. Smaller amounts are removed from water
bodies.
Economic activity neither creates nor destroys matter. All the materials
withdrawn from the environment by the economic system continue to
exist in some form. A small proportion of materials withdrawn each year
becomes a net addition to the stock of materials in the economic system.
This net addition to the economy's stock of materials is net capital invest
ment in structures, machinery, and inventories, as defined in the national
income accounts.
All the materials withdrawn from the environment but not added to the
stock of materials in the economic system are returned to the environ
ment. This is the materials balance for the entire economy. Put more for
mally, it says: In any year, returns or discharges of materials to the envi
ronment equal withdrawals less net additions to the stock of materials in
the economy system.1 Materials are removed from the environment by
extractive industries: agriculture, forestry, fisheries, and mining. Most of
the material extracted is separated from wanted material and returned to
the environment without processing and on the removal site by those who
extract it. Many such returns cause no pollution problems. Some pollu
tion problems are caused by such on-site returns, as when a slag heap
catches fire and pollutes the air or when soil disturbed by strip mining
erodes into streams and pollutes them. But most pollution problems result
from materials that are processed extensively by the economic system
and are discharged to the environment only after their use as consumer
goods by households or as material inputs by businesses.
Much processed material is of course returned to the land as solid
waste, but large amounts are discharged to the atmosphere and to natural
water bodies. The Environmental Protection Agency (EPA) [12, 1975] es
timates that total atmospheric discharges were 209 million tons in 1973.
Apparently there are no estimates of total discharges to water bodies, but
1 International trade affects where materials are withdrawn and discharged, but not the
totals. In fact, the U.S. is a net importer of materials, so that domestic discharges are larger
than withdrawals plus net additions to the stock by excess of materials imports over exports.
2. Discharges and Ambient Environmental Quality 5
EPA[12, 1976] estimates that total 1973 discharges of organic wastes and
suspended solids were 1939 million tons. Air and water pollution
problems result fundamentally from the fact that the atmosphere and
water bodies are convenient waste receptacles, inevitably outside the
system of resource allocation by market exchanges of private property.
The result is that large amounts of materials removed from the earth's
crust and surface are discharged to the ambient air and water environ
ments. Land is much easier to bring within the framework of property
rights, and pollution problems from solid waste disposal on land are there
fore relatively unimportant. In fact, the worst pollution problems from
disposal on land occur when the solid wastes enter the air and water
media, as when a dump smolders or its decayed organic material leaches
into a stream. Thus, an important part of the national environmental pro
tection program is the reduction of discharges to air and water and the
corresponding increase of discharges to land, making the pattern of dis
charges more nearly resemble that of withdrawals.
There is of course considerable natural variation in quality among water
bodies. Most dramatic is the variation in salt content between salt and
freshwater and among freshwater bodies. But every discharge to water
bodies of materials withdrawn from the environment lowers the water's
quality, although the damage done to water quality depends very much on
the time, place, and form of discharges. Thus, the fundamental relation
ship between discharges and ambient water quality is that discharges
lower ambient water quality. The effect of discharges on the ambient
environment is known as a damage function.2 It can be written
Ε = D(R), (1.1)
where Ε is a measure of environmental quality, R represents materials re
turned to the environment, and D(R) is the damage function. Presently, Ε
and R can be thought of as indexes of environmental quality or as vectors
of quality dimensions and discharges [in which case D(R) must be a vector
of damage functions]. Likewise, the reference might be to a local,
regional, national, or global domain.
Ambient water quality is of concern because it affects people's welfare.
To discuss this subject, it is necessary to distinguish between instream
and withdrawal uses of water. Instream water uses are those that occur
while the water is in its natural channel. Navigation, swimming, commer
cial and sport fishing, pleasure boating, and picnicking by a stream or lake
are examples of instream water uses. Withdrawal uses are those that re-
2 Some writers use the term "damage function" to refer to the damage done by poor envi
ronmental quality to people's welfare or utility. Here, the term "damage function" will refer
to damages done by discharges to ambient environmental quality.
