Long, Burl F.

English

Research Papers in Economics

SOUTHERN JOURNAL  OF AGRICULTURAL  ECONOMICS  December,  1970
SOME CONCEPTUAL  PROBLEMS
IN THE EVALUATION  OF
WATER POLLUTION DAMAGES
Burl F. Long*
INTRODUCTION  POLLUTION DAMAGE  FUNCTIONS
A great deal of attention has recently been focused  The Concept of Consumer Surplus
on  the  problems of environmental  pollution  and the
search for  desirable  solutions to environmental quali-  The  existence  of  externalities  seriously  compli-
ty  problems.  While water  and air pollution problems  cates  the  search  for  optimal  solutions  to  pollution
may  appear to be of less significance than many other  problems.  Economists have long considered water and
ills  confronting  society,  they  nevertheless  must  be  air  pollution  as  classic  examples  of  the  divergence
considered  serious  problems  which  have  aroused  a  between  private  and  social  costs  resulting  from  un-
great  deal  of public  concern.  It is becoming  increas-  compensated  effects  of  "technological  external
ingly  popular  to  advocate  the  importance  of  eco-  diseconomies."  Unfortunately,  we  have  not  de-
nomic,  social,  and  political  inputs  in  the decision-  veloped  very  good measures  of the external  damages
making  process  regarding  pollution  abatement  and  imposed  by  pollution  nor  effective  institutions  for
control  [2,  5] . I have  no quarrel with such advocacy  causing  such  effects  to be taken into account  in  the
as the need  for better information inputs of all types  decisionmaking  process.  Legal prohibitions and quali-
is  obviously  a  necessary  condition  for  improved  ty  "standards"  have been the usual methods used and
decisionmaking.  advocated  by legislators.  However,  these  may or may
not  bear a  close relation  to the damages  imposed  on
It  is not  always  clear  what  is  implied  by the ex-  "external users," and may not be the most efficacious
pressed  need  for  more  economic  analysis.  It  may  approach to water  quality  improvement. The need to
often mean that public agencies charged with carrying  relate pollution control programs to damages imposed
out  pollution  abatement  programs  are  interested  in  raises  problems  for  which  economic  research  results
having economists  "justify"  the decisions which have  are  meager  and  desperately  needed.  One  of  many
already  been  made,  but  are  less interested  in having  difficulties in measuring  the value of benefits accruing
economists  "evaluate"  alternative  abatement  pro-  (or damages  reduced) by raising water  quality  is that
grams.  Obviously,  the  need and opportunity  is great  the  value  depends  somewhat  on  the  legal  starting
for  economic  analysis  to  contribute  to  decisions  point. Put another way,  specification of who had the
regarding pollution abatement.  right to what uses before pollution occurred  takes on
a  great  deal  of  significance  in  evaluating  pollution
This  discussion  is  not  an  attempt  to  summarize  damage  functions.  The  effect  of legal  starting point,
damages  by water  pollution,  nor  is it  an attempt to  or  vesture  of prior  use  rights,  on  the  evaluation  of
present  a  model  for  group  or  individual  decision-  external  effects  has  recently  been raised  in this con-
making.  Its  purpose  is  a  modest  attempt  to  focus  text and others [1,8].  We cannot escape the fact that
attention on  one aspect  of the difficulties  inherent in  specification  of property  rights  play  a  major role  in
providing  useful  economic  information  to decision-  our  approach  to  environmental  quality  and  a  re-
makers,  and  to  suggest  a  conceptual  rationale  for  examination  of  our  concept  of  property  may  be
viewing  the  effects  of  a  legal  starting  point  on  the  necessary.  There is a  precedent  for  the consideration
evaluation  of pollution  damages.  Some  implications  of such  effects  in  economic  theory,  and  it  may  be
of  the  theoretical  case  discussed  will  be  examined  helpful  to economists  to view this problem through  a
through the  use of an example drawn from a study in  familiar  economic  concept - a  version of consumer
Pennsylvania.  surplus using indifference curve analysis.
*Burl F. Long is an agricultural economist,  Natural Resource Economics Division, ERS, USDA, Pennsylvania State University.
133The  concept  of consumers'  surplus  is  an old and  nd  d  leave his utility unchanged.  If the behavior line is
controversial  one and its practical usefulness has been  as  depicted  in I1, than AB would  be the amount  re-
debated by several  distinguished  theoreticians  [3, 4].  quired  to  compensate  him  for  his  loss  of  privilege
Among the clearer  expositions of the  concept  is that  without  changing  his  utility,  i.e.,  leave  him  on his
of I. M. D. Little in his chapter concerning indivisibili-  same  indifference  curve.  This is  the amount required
ties  and nonmarginal  changes  [4].  Following  Little's  to compensate him for the withdrawal of X from the
definition,  consumer surplus is defined as the amount  market or the "quantity compensating variation."
of  money  required  to  compensate  a  consumer  (or
which  he  would  be  required  to  pay)  after  some  Assume  the  individual  has  never had  the privilege
change,  in  order  to  leave  him at  the  same  level  of  to use the  water  for fishing even though the fish may
satisfaction  as before the change. 1 By definition, con-  have  been  prevalent  and  physical  conditions  would
sumer  surplus  does not arise  with respect to marginal  have  supported  recreational  activities.  Nevertheless,
changes  in  which  the  consumer  remains  on  one  he  was  legally  prohibited  from using the water  even
"behavior  line." 2 Environmental  quality  problems  before  pollution  destroyed  its  potential.3 Thus,  we
often  appear  to present  situations involving  nonmar-  find him  at point A on the diagram, a different start-
ginal  changes,  and  this  causes  problems  with  our  ing  point,  where  he consumes none of X and has  all
traditional marginal  analysis.  In many cases it may be  his  income.  The  relevant  damage might  now  be what
more  appropriate  to  think of environmental  quality  he  would  be  willing  to  pay  to have fishing restored
improvements  as creating  "new" products rather than  and be entitled to use the stream, but be permitted to
as marginal changes  in existing products.  The follow-  purchase different  amounts rather than  go without it
ing theoretical structure may be useful in viewing this  entirely.  Assume that the price of recreation  and the
sort of problem.  shape  of the behavior curve would remain the same  as
in the previous example.
Suppose  a  stream  of water  has  in  the  past been
relatively  free  from  pollution,  and  activities  such as  Starting  from point A, the  individual  would theo-
fishing  and  boating  have  taken  place.  However,  an  retically be  willing to pay  a maximum  of AC  for the
increase  in  effluent  from  municipal  and  industrial  privilege of fishing the  stream of the same  quality  as
sources has recently occurred and severely polluted the  previously,  and would  buy  OP (which  is less)  of the
water,  and,  hence,  greatly  restricted  or  even  com-  product  X.  P  is  the  point  at  which  the  consumer
pletely  destroyed  the  possibility  of  water-related  would  be  equally  well  off as  at  point  A.  AC  is  re-
recreational  activities.  The purpose  of this exercise is  ferred  to  as  the  "quantity  equilibrating  variation."
to demonstrate  that the value of the damage depends  This  situation  is  closely  analogous  to  the  situation
on  whether  the  fishermen  or  the  polluters  had  the  discussed  by  Little in which the question involves the
property  right  to use  of the  water  before  pollution  removal  of an  existing  product  from  the  market  or
occurred.  The  hypothesis  is that the damage  suffered  the introduction of a new product  [4].
by  recreational  users will be  different,  depending  on
the vesture  of this right, broadly considered  a proper-  Questions  can  be raised  concerning the nature  of
ty right.  the  assumed  behavior lines.  The product  in question
is represented  on the horizontal axis while the vertical
Assume  an individual  has had the  right to use the  axis  can be thought of as representing  all other goods,
water  for  recreation.  At  a  given price  of o^  (the  or  as  money  income.  The  curve  represents the  indi-
slope of the budget line  AX) the individual  wll  con-  vidual's willingness  to trade money for  fishing in this
sume  OE1 of the recreation product  (fishing) in order  particular  stream.  The  fact that  the  curves intersect
to  equate  his  marginal  utility  with the  price  ratio,  the vertical  axis implies that there is some amount of
which  is his optimum consumption  point (Fig.  1).  If  money  sufficient to  compensate  him for  the loss  of
we  suppose  pollution occurs, which makes the stream  the  privilege  of buying  the product.  If these  curves
completely  unsuitable  for  fishing,  we  can  ask  how  approach  but never  intersect  the vertical axis,  it im-
much would be required to compensate the individual  plies  that there  is  no amount  of money  sufficient  to
VWhile  Little's exposition  of the concept is excellent, he is not an advocate of the usefulness  of consumer  surplus, and is
critical of those who advocate its usefulness  in practical problems.
2Little  prefers  "behavior  lines"  rather  than  "indifference  curves"  although  he  indicates  that  one  could  use  them
somewhat  synonymously.  The  term behavior line or  hypothetical  choice  functions  seem  to more accurately  connote the idea of
choice.
3An alternative  assumption would be  that the waste  dischargers  had the right  to  use the stream for waste disposal, and
the recreationists were required to bargain for the use rights.
134compensate  for  the  loss  of this product.  The  avail-  treated effluent from a large pulp and paper manufac-
ability  of  substitutes  for  this  particular  product  is  turing  plant located on the stream. From the point of
reflected in the shape of these curves.  effluent  discharge to the junction of the West Branch
with the  South Branch  (above  the  city of York), the
The  conclusion  from this over  simplified example  water  quality  will  not  support  fish  life.  The  major
is  that  the benefits  of pollution control  (or damages  problems  in  this  10  mile  stretch  are  low  dissolved
foregone  by eliminating  pollution)  to  fishing  would  oxygen  levels  and  high  discoloration.  The  pulp  and
be greater if the individual (and others similar to him)  paper  manufacturing  plant  currently  provides  high
had  previously  had  the  privilege  of using the  stream  level secondary treatment which removes about 85-90
for  fishing  before  it became  polluted than would  be  percent  of  the  raw  waste  load,  but  because  of low
the  case  if he had  not  previously  had this privilege,  natural streamflow the water is still polluted from the
Thus,  specifications  of property  right  becomes  very  standpoint  of supporting  fish  life.  The Pennsylvania
important in  the evaluation of damage functions. We  Department  of  Health  has  established  quality  stan-
need  to  understand  that  "where  we  start"  makes  a  dards  and  criteria  for  protecting  specific  uses of the
great  deal of difference  in the outcome.  stream, including warm water  fish which will require
very  expensive  tertiary  treatment,  perhaps  about
A Case in Point  $300,000 per mile  annually  [6].  No requirement  for
determining  economic  values  of the  uses  to be pro-
Cordorus  Creek is a small, shallow gradient stream  tected  is  required  under  provisions  of  "The  Clean
which  flows  in  a  northeasterly  direction  through  Streams  Law" of Pennsylvania.  It is implied  that the
York  County, Pennsylvania, and drains  into the Sus-  uses  to  be  protected  are  worth whatever  it  cost  to
quehanna  River.  The  normal  average  streamflow  in  protect  them.  I  am  bothered  by  this  approach  and
the  West  Branch  of Codorus  Creek is  approximately  believe  that more attention to the evaluation of bene-
2.6  million  gallons  per  day,  with the volume  falling  fits would likely improve the decisions made. We have
much  lower  during  the  dry  summer  months.  How-  made  some  estimates of the costs of waste treatment,
ever,  the streamflow  is augmented by  16 MGD highly  but  we  know  much  less  about  benefits  or  damage
A
c0
c--:
. -'  \
T)
P  E1 .X  X
Quality  of  Recreation  Activity
FIGURE  1.  ILLUSTRATION  OF EFFECTS OF PRIOR RIGHTS ON VALUE  OF RECREATION  DAMAGES
135reduction associated with improved  water quality.  evaluation  of damages  depends, among other things,
on the legal starting point cannot be ignored.
In view of the  extremely low natural flows during
critical  periods, it seems apparent that little or no fish  Although  the  case  discussed  has  some  unique
life  could  be  expected in the  absence of the  16  mil-  aspects, it is not an unrealistic  case.  Only one  aspect
lion  gallons  of treated  effluent  which currently sup-  of  the  problems  encountered  in  the  economics  of
plements  streamflow.  It  follows  that  sport  fishing  water  quality  has  been  considered.  A  crucial  need
could  not be expected  to occur  in the absence  of the  exists  for  economic  inputs  into  the  decisionmaking
paper  mill  and  its  treated  effluent,  unless  other  process  in water  quality  management,  but  we  must
streamflow  augmentation  were  provided.  Thus,  fish-  also clearly  understand the institutional aspects of the
ing was not an available alternative in this stream even  problem.
if it had  not been polluted by the treated effluent of
the plant.  The point to be emphasized  is that it seems  There is indeed a crucial need for empirical studies
reasonable  to  evaluate  the damage  to fishing on this  to estimate  pollution abatement benefits or pollution
stream  in  recognition  of the  fact  that fishing  could  damages  associated  with  alternative  levels  of  water
not be considered  areal alternative  in the absence of  quality.  Decisions  are  being  made  and  will be made
the  mill and its treated effluent. On the other hand, it  with  or  without  economic  inputs.  The  evaluation
does  not  seem  realistic  to evaluate  the  damages  to  problem  cannot  be  ignored;  values  will  be  assigned
fishing  reduced by pollution  abatement  as though an  either explicitly,  or implicitly  as is often  done  in the
existing  sport (fishing)  had been destroyed  by pollu-  absence  of economic  data. Economists have  a major
tion of a fishable stream.  In placing a value on fishing  role to play in water quality and other environmental
damages  reduced  by pollution abatement, there is the  quality  issues.  The  major needs are multidimensional
question  of  how  much  compensation  would  be  re-  and are particularly acute in the economic institution-
quired  to  leave  fishermen  as  well  off as they  would  al area.
have been without the paper mill and its treated efflu-
ent,  rather  than  with the  effluent  in  an  unpolluted  Take  note  of  Pigou's  admonition  that  abstract
state.  Thus, defining  who had the right to which uses  arguments,  if they only  construct  empty boxes, can-
before pollution occurred  may make a significant dif-  not  show  what  is empirically  right,  but  can  often
ference  in  the  evaluation  of  damages  reduced  by  indicate what  is wrong, and perhaps even more  often,
pollution abatement.4 what  is unproved.  In  order  to  even  come  close  to
giving good answers,  we must be sure  we know what
questions  we  are  asking.  Unless  we  are  careful  to
CONCLUSION  recognize  institutional  as  well  as  physical  and  eco-
nomic  aspects,  we  are unlikely to get  answers  which
The  intent  of this  article  was  to call attention to  will be of maximum usefulness in the decisionmaking
an  often  neglected  aspect  of  evaluating  pollution  process.  Economists  have  an important  contribution
damages.  In  addition  to other  difficulties of quanti-  to  make  in  the  field  of water  quality  management,
fying  damage  functions, consideration  must be given  not  only  in  providing answers but also in  the choice
to  the  distribution  of use  rights.  The  fact  that the  of questions to be answered.
REFERENCES
1.  Demsetz,  Harold,  "The  Exchange and Enforcement of Property Rights," Jour. of Law and Economics, Vol. 7,
pp.  11-26, Oct.  1964.
2.  Federal Council for Science and Technology,  "Water Resources Policy and Political Institutions," A Report of
a Panel  on Needed Research, Washington,  D. C., July  1968.
3.  Hicks, J.  R., "The  Rehabilitation  of Consumer's  Surplus,"  Review of Economic Studies, Vol. 8, pp.  108-116,
Feb.  1941.
4It  should be noted that the availability  of close  substitutes is  assumed  here. The  product  in question  is fishing in this
particular stream, not fishing generally.
1364.  Little, I. M. D., A Critique  of Welfare Economics, Chapter X, Oxford University Press,  1957.
5.  National  Academy  of  Sciences-National  Research  Council.  Waste Management and Control, Committee on
Pollution, Publication  1400, Washington,  D.C.,  1966.
6.  Pennsylvania  Department  of Health,  Implementation Plan for Intrastate Waters, York Hearing  Area,  Harris-
burg, Pa., Dec. 20, 1967.
7.  Schmid,  A.  Allan,  "Economic  Rules  for Water  Quality  Externalities,"  Water Resources and Economic Devel-
opment of the West, Report No. 12, Western Agricultural  Economics Research Council,  pp. 73-81,  1963.
8.  ,  "Non-Market  Values and Efficiency  of Public  Investments in Water  Resources,"  Amer.
Economic Review,  Vol. 57, No.  2, pp. 158-168,  May  1967.
137

SOME CONCEPTUAL PROBLEMS IN THE EVALUATION OF WATER POLLUTION DAMAGES

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