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Valuing Ground Water: Economic Concepts and Approaches
action has on local water rates and taxes is frequently the controlling factor in a water management decision.
The public has become progressively more involved in water-related decision-making in the past few decades. Because of the pervasive importance of water availability in virtually all types of activity (in households, commercial development, industry, and agriculture) water issues are commonly linked with concerns about economic growth. Water management decisions are often infused with local or regional politics and burdened with a heavy overlay of social values. As a result, the degree of autonomy of local and regional water providers varies greatly among and within states.
History of Economic Valuation of Natural Resources
The principles for valuing natural assets such as energy and mineral deposits, forests, and aquifers were set forth more than 60 years ago. This research established a relationship between the value of the asset and the present value of the services it provides. Some of the earliest attempts to value nonmarketed goods and services focused on environmental and natural resource assets. One of the first such efforts involved the development of value measures for water resources used in irrigated agriculture in the western United States. Linear programming models and other techniques were used to estimate the value of both surface and ground water by examining how the profitability of farm enterprises changed as water became more or less available. These techniques worked well in assigning economic value to water use in agriculture since water is an input to the production processes of firms whose products are sold in reasonably well functioning markets. These early methods, which highlighted the valuation of nonmarketed inputs, were not well adapted for measuring the value of nonmarketed outputs that are consumed directly.
Principles for measuring the consumptive value of water for household use were set forth a century ago. The idea of using a demand curve to measure the value of a good as the area under the demand curve (consumer surplus) was articulated in the late 19th century, and applied methods for doing so have been developed ever since. Hewitt and Hanemann (1995) provide a sophisticated example of an application to urban water.
Two techniques were developed specifically for the estimation of nonmarketed outputs: the travel cost method (TCM) and the contingent valuation method (CVM). The first, created to value visits to national parks, is an example of an indirect methodology to infer values of nonmarketed goods and services by examining ancillary evidence such as expenditures on travel. Refinements in the TCM and the development of other indirect techniques have enhanced the ability of economists to value a wide range of natural resource and environmental services, including improvements in air and water quality. These indirect tech-