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Measuring Water Quality Benefits
Measuring Water Quality Benefits
International Series in Economic Modeling
Editor:
M. Ray Perryman, Herman Brown Professor of Economics Center for the Advancement of Economic Analysis Hankamer School of Business Baylor University
Previously published books in the series:
Perryman, M.R. and Schmidt, J.R.: Regional Econometric Modeling
Becker, Jr., W.E. and Walstad, W.B.: Econometric Modeling in Economic Education Research
Measuring Water Quality Benefits
V. Kerry Smith Vanderbilt University Nashville, TN
William H. Desvousges Research Triangle Institute Research Triangle Park, NC
Kluwere N ijhoff Publishing a member of the Kluwer Academic Publishers Group Boston/Dordrecht/Lancaster
Distributors:
for the United States and Canada: Kluwer Academic Publishers, 101 Philip Drive, Assinippi Park, Norwell, MA 02061
for the UK and Ireland: Kluwer Academic Publishers, MTP Press Limited, Falcon House, Queen Square, Lancaster LA1 1RN, UK
for all other countries: Kluwer Academic Publishers Group, Distribution Centre, P.O. Box 322, 3300 AH Dordrecht, The Netherlands
Library of Congress Ca1aloging·in·Publlca1ion Data
Smith, V. Kerry (Vincent Kerry), 1945-Measuring water quality benefits
(International series in economic modeling) Includes bibliographies and index. 1. Water quality management-United States-Cosl
effectiveness. I. Desvousges, William H. II. Title. III. Series. HC110.w32S64 1986 333.91'16 86-18570 ISBN 0-89838-181-9
Copyright (c) 1986 by Kluwer-Nijhoff Publishing, Boston
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher, Kluwer-Nijhoff Publishing, 101 Philip Drive, Assinippi Park, Norwell, MA 02061
Printed in the United States of America
CONTENTS
ix Figures .. Tables .. Preface ..
.. .................... xi
2
3
Measuring Water Quality Benefits: An Introduction ........ .
1.1 Boc~~~ ................ . 1.2 Regulation: An Overview . 1.3 Objectives .. 1.4 Preview. 1.5 References
The Conceptual Basis of Benefits Estimation.
2.1 Introduction ......... . 2.2 A Brief Review of the Conventional Theory of Benefits
Measurement ......... . 2.3 The Treatment of Nonuse Values and Uncertainty
in Benefit Analysis ................... . 2.4 Measuring the Benefits Associated with Changes
in Environmental Amenities: An Overview 2.5 Benefit Measurement Approaches Considered in This Study.
2.5.1 The Travel Cost Approach .. ' 2.5.2 The Contingent Valuation Approach 2.5.3 The Contingent Ranking Approach.
2.6 Summary 2.7 References ........ . Appendix; Analytical Background for Valuation Under Uncertainty.
Survey Design.
3.1 Introduction. . ................ . 3.2 The Monongahela River Basin
3.2.1 Geography ........... . 3.2.2 Uses ........... . 3.2.3 Recreation 3.2.4 Basin Socioeconomic Profile
3.3 Sampling Plan. . ....... . 3.3.1 Target Population. 3.3.2 Sample Selection and Survey Design
v
xiii
1 5 7 8
10
13
13
14
24
31 34 34 35 36 37 37 41
53
. ........ 53 53 53 55 56 57 57 57 57
vi
4
5
6
3.4 Survey Plan .. 3.4.1 Questionnaire Design and Limited Local Pretest. 3.4.2 Retaining Field Supervisors and Hiring Interviewers . 3.4.3 Counting and Listing of Sample Segments 3.4.4 Developing Field Manuals and Conducting
Interviewer Training 3.4.5 Conducting Household Interviews .. 3.4.6 Initial Contacts and Obtaining Cooperation 3.4.7 Household Enumeration ................ . 3.4.8 Interviewing Procedures. . ......... . 3.4.9 Implications.
3.5 References Appendix: Interviewer Debriefing.
Contingent Valuation Design and Results: Option Price and Use Values ........... .
4.1 Introduction .. . 4.2 Design Issues and Contingent Valuation
4.2.1 Eliminating Information and Hypothetical Biases .. 4.2.2 Considering the Role of Framing Biases 4.2.3 Addressing Procedural Issues
4.3 Questionnaire Design .. 4.3.1 Part A-Background ...................... . 4.3.2 Part B-Benefits Measures.
4.4 Profiles of Survey Respondents .................. . 4.5 Protest and Outlying Bids.
4.5.1 Protest Bids. 4.5.2 Identifying Outliers.
4.6 Distribution of Option Price Responses .. 4.7 Mean Option Price Responses 4.8 Test Findings: Starting Point and Interviewer Biases 4.9 Use Value Results. . ....... . 4.10 Implications ... 4.11 References. . . . ................ . Appendix: Additional Empirical Results. . ....... .
Measuring Option Value
5.1 Introduction ............... . 5.2 Recent Estimates of Option Values .. . .. 5.3 Measuring Option Value: Survey Design 5.4 Survey Results-Option Value .
5.4.1 Option Value-Demand Uncertainty 5.4.2 Option Value-Supply Uncertainty.
5.5 Summary. . ....... . 5.6 References.
The Contingent Ranking Method and Benefit Estimation ......... .
6.1 Introduction
58 59 60 60
60 61 62 62 63 65 66 67
71
71 72 74 75 82 82 82 84 92 94 97 98
102 105 106 109 110 112 116
121
121 122 131 134 135 140 141 142
145
145
7
8
9
6.2 The Random Utility Model of Consumer Behavior with Discrete Choices ........... .
6.3 Estimation of Random Utility Models with
6.4 6.5 6.6
6.7 6.8 6.9
Ordered Alternatives .. Contingent Ranking and Valuing Public Goods. Applications of Contingent Ranking Method . Monongahela Contingent Ranking Experiment: Design and Estimates. Benefit Estimates with Contingent Ranking Models Implications and Further Research. References .
The Travel Cost Approach to Recreation Demand Modeling: An Introduction.
7.1 7.2
7.3 7.4 7.5
7.6 7.7
Introduction The Household Production Framework and Recreation Demand Models The Opportunity Costs of Time Measuring Site Usage. Heterogeneous Recreation Sites and Site Characteristics Summary .. Refere~ces
Travel Cost Model: Data Sources and Variable Measures
8.1 Introduction. 8.2 Sources of Data.
8.2.1 The 1977 Federal Estate Survey 8.2.2 Recreation Resources Management System 8.2.3 National Water Data Exchange 8.2.4 Personal Correspondence
8.3 Survey Issues. . . . . . . . . . . . . .. . ......... . 8.3.1 Onsite Survey. . ....... . 8.3.2 Multiple Visits.
8.4 Data Character ... 8.4.1 The Quantity Measure: Visits 8.4.2 Distance Cost Component of Travel Costs ........ . 8.4.3 Time Cost Component of Travel Costs ...
8.5 Site Profile .......... . 8.6 Congestion at U.S. Army Corps of Engineers Sites 8.7 Water Quality . 8.8 Users 8.9 Profile of Activities at the Corps Sites 8.10 Summary 8.11 References ................. .
Generalized Travel Cost Model
9.1 Introduction .......... ..
vii
146
150 153 157
165 173 178 178
181
181
182 188 195
199 204 204
209
209 209 209 210 212 212 212 212 213 214 214 215 215 217 220 222 228 231 234 234
237
237
viii
10
11
9.2
9.3 9.4 9.5 9.6
Implementing the Generalized Travel Cost Model 9.2.1 The Conceptual Links Between Visits and
Characteristics. 9.2.2 The Two-Step Estimation Procedure 9.2.3 Additional Econometric Considerations .
Estimating the Generalized Travel Cost Model . Valuing Water Quality Changes Summary References
Comparing Direct and Indirect Benefit Estimation Approaches
10.1 Introduction .. 10.2 Past Comparisons of Benefit Estimation
Approaches: A Review . . . ........ . 10.3 A Comparison ofthe Generalized Travel Cost
Model and Contingent Valuation 10.4 A Comparison of a Simple Travel Cost Model
and Contingent Valuation ................. . 10.5 Comparisons of Benefit Estimation Approaches:
Some Interpretations. 10.6 References
Research Issues in Benefit Estimation
11.1 11.2 11.3 11.4 11.5
Introduction Our Findings: A Perspective. Measuring Nonuse Values Site Attributes and Recreation Demand Contingent Valuation Versus Indirect Methods for Benefit Estimation
11.6 Benefits Transfer ... 11.7 Prognosis 11.8 References
Appendix A: Survey Questionnaire as Administered During the Monongahela River Basin Survey . . . . . . . . . . . . . . . . . . . . . . . ........ .
Index ..
238
238 239 242 245 253 258 259
261
261
262
267
270
274 276
279
279 280 282 284
285 294 295 297
303
319
FIGURES
1-1
2-1 2-2 2-3 2-4 2-5
2-6
3-1 3-2 3-3
4-1 4-2 4-3 4-4 4-5 4-6 4-7 4-8 4-9
6-1 6-2
7-1
9-1
Effects and responses to water quality regulatory actions
The demand function and the consumer surplus welfare measure. A comparison of alternative welfare measures .. Surplus measures for a change in quantity Graham's willingness-to-pay locus ........ . Smith-Krutilla framework for classifying the measurement bases and approaches of economic benefits resulting from improved water quality. Travel cost demand function with water quality improvement .
Map of Monongahela River and other area recreation sites. Geographic location of survey area. Summary of completed interviews .
Classifications of potential biases in contingent valuation Activity card Site activity matrix ..... . ....... . Map of Monongahela River and other recreation sites .......... . Recreation sites ... Water quality ladder . Value card .................. . Payment card Frequency of option price responses for different question formats .
Information processing, decision experience, and contingent ranking. Rank order cards.
Income-time constraints with wage differences and indivisibilities
Illustration of the effects of water quality on the demand for a recreation site .
6
14 18 20 29
32 34
54 58 62
73 83 84 85 85 86 88 89
104
154 166
191
255
TABLES
1-1 Regulatory impact analysis for iron and steel industry .. ... 4
2-1 Alternative welfare measures and types of consumer surplus measures for contingent valuation studies 21
3-1 Comparative survey performance: present survey versus Mitchell-Carson [1984] survey. 64
4-1 Summary of option price question formats by interview type 91 4-2 Characteristics of key respondent groups .. 93 4-3 Degree of importance of water quality by key respondent groups 95 4-4 Respondent attitudes about self by key respondent groups. 96 4-5 Profile of outliers . 101 4-6 Results for thick-tailed tests .................. 103 4-7 Estimated option price for changes in water quality:
effects of instrument and type of respondent .. 105 4-8 Student t-test results for option price .... ......... 107 49 Regression results for option price estimates. ................... 108 4-10 Estimated use values-protest bids and outliers excluded 110 4-11 Regression results for use value estimates of water quality
changes-protest bids and outliers excluded 111
5-1 Summary of Mitchell-Carson [1981] estimated mean annual willingness to pay by version and water quality 126
5-2 Summary of option price questions by type of interview. 134 5-3 Summary of use, supply uncertainty, and existence value questions. 135 5-4 Estimated option values for water quality change: effects of
instrument and type of respondent-protest bids and outliers excluded 136 5-5 Student t-test results for question format .......... 138 5-6 Regression results for option value estimates-protest bids and
outliers excluded ......... , ... 139 5-7 Effects of supply uncertainty on option price ...... 141 5-8 Student t-tests for the effects of supply uncertainty for users 141
6-1 Contingent ranking studies used for environmental benefit estimation 158 6-2 Combinations of water quality and payment for Monongahela
contingent ranking survey . .............. 167 6-3 Frequency distribution for the rankings of annual payments
and water quality ............ 168 6-4 Selected results for the random utility model with ranked
logit estimator ....... 170
xi
xii
6-5
6-6 6-7
7-1
7-2
8-1 8-2 8-3 8-4 8-5
8-6
8-7
9-1 9-2
9-3
9-4 9-5 9-6 9-7 9-8
10-1 10-2
10-3
10-4
10-5
10-6
11-1 11-2
Comparison of ordered logit and KeenerWaldman [1985] ordered normal ML estimator. Benefit estimates from contingent ranking models. Benefit estimates from contingent ranking models with individual specific variables .
Test results for alternative treatments of opportunity cost of time:
173 176
177
OLS estimates 194 Summary of Hausman [1978] test results 198
Schedule of interviews at U.S. Army Corps of Engineers sites. . . . . . . . . . . 211 Summary of predicted hourly wage rates 216 Characteristics of sites selected from Federal Estate Survey . . 218 Sites with congestion, by period of time and level of congestion. ......... 221 Mean water quality parameters and index values, for June through September, by site 223 Characteristics of the sites and the survey respondents selected from the Federal Estate Survey. . . . . . . . . . 229 Respondents' recreational activities, by site ... 232
Effects of truncation on the estimates for travel cost models 246 ML and OLS estimates of general model by site LN visits = ao + a1 (T+M) costs + a2 income 248 Marshallian consumer surplus per unit of site use: OLS versus ML estimates. . . . . . . . . . . . . . . . 251 Generalized least-squares estimates using ML site demand estimates 252 Partial effects of site characteristics on site demand. . 254 Dissolved oxygen and recreation activities 255 Benefits for water quality improvements 257 A comparison of alternative estimates of the benefits of a water quality improvement from boatable to fishable conditions. . . . 258
Bishop-Heberlein comparative results for benefit approaches 264 Seller, Stoll, and Chavas [1985] comparison of travel cost and contingent valuation approaches ...... . . . . 207 A comparison of generalized travel cost and contingent valuation estimates of the benefits of water quality changes . . . . 269 A comparison of site characteristics: U.S Army Corps of Engineers versus Monongahela sites. . . . . . . . . . . . . . . . . 270 A comparison of the simple travel cost and contingent valuation estimates of water quality benefits 271 Regression comparisons of contingent valuation and travel cost benefit estimates . . . . . . . . . . 273
Starting point bias results ................ . Characteristics of alternative question formats: an assessment
290 292
PREFACE
Almost 5 years ago we began working together on research for the U.S. Environmental Protection Agency (EPA) to measure the benefits of water quality regulations. EPA had awarded a contract to Research Triangle Inst~ute (RTIl in response to a proposal that Bill wrote on measuring these benefits. After meeting with the EPA project officer, Dr Ann Fisher, the basic outlines of what would become this research were framed. Upon the suggestion of Bob Anderson, then chief of the Benefits Branch at EPA, we selected the Monongahela River as the focal point of a case study that would compare alternative benefit measurement approaches. Exactly how this case study would be done remained vague, but Ann urged that there be a survey and that nonuse benefits be included in the questionnaire design. Of course, Bill agreed.
At the same time, Kerry was independently working on a review article that tied together some of the loose threads in the option value literature. He had also been thinking about how to measure option value, as well as working on ways to generalize the travel cost approach for estimating benefits of site attributes. Glenn Morris at RTI suggested that Bill have lunch with him and Kerry and that they could talk about Bill's research to see if there were any mutual interest. Over the lunch and Bill's ever present dessert in a Chapel Hill restaurant, we found out just how much we have in common.
With Ann Fisher's support, and the assistance of many others, in 1983 we published A Comparison of Altemative Approaches for Estimating Recreation and Related Benefits of Water Quality Improvements for EPf'is Environmental Benefits Analysis Series. That volume, which we refer to as the Monongahela report, summarized where we were 2 years ago in our research. Subsequently, we have completed additional research both for Ann Fisher and Reed Johnson at EPA (Contract Nos. 68-01-5838 and 68-01-6596). We have also written several articles that have discussed various aspects of our water quality research. But, until now, we have not been able to put all of this research together in one place. This book reflects where we are 5 years after our beginning.
Over the past few years we have received, and taken, ideas from many different people for our various research efforts. Trying to acknowledge each one would be impossible. Instead, we would simply like to thank the many people, both from government and academia and at RTI, who have helped us in our research over the years. Your support is appreciated. '
We would also like to acknowledge the contributions of several people who have contributed to this book. As always, at the top of the list is Ann Fisher Without Ann's initial confidence in us, and her continued support, there would be nothing for us to write about. Ann participated as a coauthor in some of the research we describe here and always helped to improve the clarity and substance of the reports and articles we have drawn upon for this volume.
After reviewing and rewriti ng some of the material from ou r su rvey of the Monongahela River residents, we are again reminded of the thoughtful, careful attention that Kirk Pate, who works with Bill at RTI, brought to the survey questionnaire and the data collection. Now with the perspective provided by the past five years of research we can more fully appreciate Kirk's efforts.
xiii
xiv
We would also like to acknowledge Matt McGivney for his assistance over several years in organizing, analyzing, and preparing many of the empirical results we report here. Tayler Bingham also has shared his wise counsel and sound advice on many of our research activities.
Both of our families have generously given time to us, both for doing the research and for writing this manuscript. The continued support and understanding of Pauline, Timothy, and Shelley are essential to all that Kerry does and this volume has clearly not been an exception to that rule. For Bill, Shelley and Anne continue to be a source of love and encouragement. We thank you all.
In reaching the end of this long process, we are reminded of the people who carry the load for this book itself. At Kluwer, first David Marshall and now Zachary Rolnik have supported our efforts at getting this into print. We would also like to thank Hall Ashmore for his editorial help over the years and for his efforts on the first and last chapters of this manuscript. We have all learned frorn Halls visual sense and verbal style, not to rnention his enthusiastic moral support and his willingness to let us split our infinrtives. Sue Piontek helped convert Kerry\:; seemingly unending drafts and revisions Into readable drafts. However, the person who coordinated the production of this rnanuscript and is rnost responsible for its appearance-from the first word in the Preface to the last word in the Index-is Jan Shirley. Through Jan's persistence and her generous gifts of weekend hours, we have a manuscript that is visually pleasing. Jan and her staff of word processing specialists, especially Cathy Boykin and typesetters Beth Tressler and Debbie Walker, can take credit again.
Measuring Water Quality Benefits
