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Valuing Ground Water: Economic Concepts and Approaches
goods not usually traded in markets. The ability to assign values to such goods and services has improved the accuracy of benefit-cost analysis. Inclusion of economic values for some important (and previously ignored) classes of environmental services enables benefit-cost assessments to reflect more fully the consequences of natural resource policies and regulations.
Some of the earliest attempts to value a nonmarketed natural resource involved the value of water to agriculture in the western United States. Since water has traditionally been allocated to farmers and other users according to the prior appropriation doctrine ("first in time, first in use"), information was not available on the user's willingness to pay for water. To estimate (impute) a value for irrigation water, economists used models and techniques borrowed from studies of the behavior of firms, such as profit-maximizing models of farm behavior cast as linear or other programming models. Specifically, economists had to infer value by examining changes in returns to the farm associated with changes in the amount of water applied. In this way they could estimate the value of both surface and ground water.
These early water resource valuations used conceptual models and estimation techniques that had been developed and used primarily for analyzing market-related issues. These techniques worked well in assigning an economic value to water use in agriculture, given that water is simply an input into the farm's production process and that abundant cost data (on other inputs) and revenue information for farm operations existed.
The first application of techniques developed specifically for valuing nonmarketed commodities involved the travel cost method (TCM), Hotelling proposed in 1946 as a means of valuing visits to national parks. The travel cost method, in its numerous variants, has been used extensively to assess the value of a commodity used directly by the consumer, namely outdoor recreation. Refinements of the travel cost method and the development of new techniques, such as the contingent valuation method (CVM) and hedonic price method (HPM), enhanced the ability of economists to value a wider range of use values for environmental commodities, including improvements in air and water quality. Within the past decade, attention has shifted to estimating nonuse values, such as what individuals are willing to pay to ensure the existence of species or unique natural settings. The values elicited with these techniques for specific environmental goods and services are being used in an increasing array of settings; however, their use is not without controversy, as discussed later in this chapter.
The development of nonmarket valuation techniques enabled economists to place values on individual environmental commodities. However, policy and regulatory attention is now increasingly focused on the management of ecosystems. Valuing complex hydrologic or ecological functions and the associated range of service flows is relatively uncharted territory and raises a number of conceptual and practical issues. For instance, natural scientists cannot unambiguously define and measure ecosystem performance and endpoints. Other