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Measuring Costs and Benefits of Reducing Eutrophication

Measuring the benefits and costs of an improvement in water quality is often difficult. First, for a complete analysis, all relevant benefits and costs have to be measured. If some consequences cannot be monetized, then analysis becomes more complex, though feasible. The effects on all parties concerned have to be taken into account. Second, the physical benefits and costs have to be measured in monetary units. Some environmental goods and services are marketed and thus have prices associated with them, for example, commercial fishing. There are methods for estimating costs and benefits in such cases. These "market-based methods" involve tallying the payments that consumers actually make for better water, better recreational sites, more desirable fish species, or other attributes of a cleaner water body. Also, the cost savings to consumers such as those due to fewer illnesses and lower use of water filters have to be taken into account. Other values associated with improved water quality, such as aesthetic values and species diversity have no connections to markets. These values must be measured by other means.

The concept of "willingness-to-pay" (WTP) is widely used to represent how much of a person's resources they would be willing to contribute to solving an environmental problem. It might more appropriately be called "willingness-to-sacrifice." This is a subtle point because in general we are not asking a person to pay, only trying to determine the maximum amount of resources they would divert from other worthwhile activities to enhance environmental quality. In a market economy, WTP is a relatively easy concept to grasp. However, a monetary measure of WTP is meaningless to a subsistence farmer.

Economic effects of eutrophication and types of benefits derived from reducing eutrophication are outlined in Table 5. Common economic methods used to measure different types of benefits outlined in the table and commonly used valuation techniques are discussed below.

Market-based Methods

Market-based methods are used when people make choices in the market place among goods or services that have some environmental characteristics. The observed market choices can be used to estimate the value consumers place on environmental factors. For example, when people rent or buy property, one of the factors they may consider includes water quality in the area. The price they pay for a particular property will reflect the value they place on the environmental qualities, as well as other characteristics of the property. By statistically analyzing differences in prices and differences in environmental quality, it is possible to estimate peoples' WTP for particular environmental qualities as distinct from other characteristics of the property such as lot size and location. This method is known as the "hedonic" method.

A second method that uses market information is called the "travel cost method," which is typically used to estimate value of recreation sites. Visitors to such sites incur time and travel expenses, which is a proxy for price and reflects the willingness to pay for the characteristics of the site. The method uses data on the type and number of recreation trips that people make to different sites at varying levels of expenses. Statistical analysis is used to estimate the relationship between the attributes of the trips and travel costs. This is a useful method when trying to understand the benefits of improving environmental quality at particular sites, such as the benefits of reducing eutrophication at one lake versus another.

A third type of market-based valuation relies on observing changes in the cost of what is used by individuals and firms. For example, if a particular environmental improvement promises to reduce illness in a population, there should be fewer doctor visits, fewer workdays missed, and less medication prescribed. The savings from fewer visits to doctors, the income that results from more days worked, and the reduced expenditures on medication together might be used to assign value to the environmental improvement. This will be a lower-bound estimate of value, because people probably value the freedom from illness more than the monetary cost of remedies or lost wages.

All of these market-based approaches are more realistic and meaningful where markets are the predominate places where goods and services are exchanged and where prices are freely determined, not administered. These circumstances more closely describe the economies of developed nations than developing nations. In developing nations, analysts may be forced to seek non-market alternatives for assigning values.

Methods Based on Hypothetical Markets

Often, the value of environmental quality cannot be estimated from market information. In such cases, methods based on hypothetical situations are often used. Also known as the contingent valuation method, these methods typically involve survey research to solicit verbal willingness to pay for specified environmental amenities. People are surveyed, through mail, phone, or personal interview, and asked to state their preference for alternate scenarios. They are also asked to specify their willingness to pay for the scenario as if it were available to them. For example, the survey may ask the willingness to pay to reduce eutrophication such that water clarity increases by a specified amount or that fish species increase by a certain number. The contingent valuation method allows the estimation of value directly from survey responses.

The method is flexible and statistically less challenging than many market methods, but may also be subject to inaccuracy due to the hypothetical nature of the investigation. It has been strongly criticised when governments have used the results to formulate policy. The major criticism of the contingent valuation method has centred on its hypothetical nature. The method is useful for extracting information relevant to a particular issue but the monetary values are hypothetical and non-replicable.

The aim when applying the contingent valuation method has been to determine the benefits of a particular policy. Searching for accurate data and carrying out interviews for contingent valuation incurs costs that can be substantial for developing countries. If the decision has been made by government that eutrophication is a problem then the questions arises, do we need to know the benefits (financial and/or economic) given that eutrophication has been established as an environmental problem? Rather than invest in contingent valuation it may be more appropriate to implement a policy and invest in monitoring activities, thus dealing with the problem directly. Policies can be implemented at low cost and scarce funds can be used to monitor the impact.

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