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Valuing Ground Water: Economic Concepts and Approaches
lands. Boyle and Bergstrom (1994) proposed a similar framework for measuring the economic benefits of ground water in a report prepared for the U.S. Environmental Protection Agency. While the impetus for Boyle and Bergstrom's report was the need to incorporate the value of ground water resources when conducting regulatory impact analyses, the framework they developed and the variation of that framework outlined here are applicable to other policies and programs that affect ground water resources.
Ground Water as a Natural Asset
Ground water can be considered a natural asset. The value of such an asset resides in its ability to create flows of services over time. As discussed in Chapter 1, there are two broad categories of resource services provided by ground water: extractive and in situ . The relationships among these are illustrated in the schematic diagram shown in Figure 3.1.
In each time period depicted in Figure 3.1, a ground water stock provides each of the services and is subjected to various influences that affect its quality. Of course extraction and/or addition of water today affects the quantity and quality of stocks tomorrow, and it is critical to incorporate this intertemporal element into the analysis of the valuation problem. Intertemporal issues are related to each of these service flows, and understanding them is fundamental to understanding the overall valuation problem.
The Concept of Total Economic Value
The total economic value (TEV) of ground water is a summation of its values across all of its uses. Sources of values have been classified into use values (sometimes called direct use values) and nonuse values (also known as passive use values, existence values). The use values arise from the direct use of a good or asset by consuming it or its services. For ground water, these would include consumption of drinking water and other municipal or commercial uses. Nonuse values arise irrespective of such direct use. Thus in the economist's jargon the total economic value of a given resource asset includes the summation of its use and nonuse values across all service flows. The notion of total economic value is fundamental to ground water valuation and should enter into management decisions regarding use of water resources. Valuation is a useful tool if the values can help inform decision-makers. The relevant issue is how the TEV of ground water will change when a policy or management decision is implemented.
Prices are often used as a proxy for values. In settings where goods or services (for example, eggs and haircuts) are traded through markets, prices are a good proxy for the value of the last, or the marginal, unit that is traded. As more