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Why do an economic analysis?

Why do an economic analysis?. Estimating expenditures to abate pollution Assessing alternatives for multiple objectives Determining how costs of abatement should be allocated Evaluating the trade off between preservation and development of new natural resources

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Why do an economic analysis?

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  1. Why do an economic analysis? • Estimating expenditures to abate pollution • Assessing alternatives for multiple objectives • Determining how costs of abatement should be allocated • Evaluating the trade off between preservation and development of new natural resources • Comparing short-term costs and long-term benefits of protecting natural resources

  2. Economic Concept of Value • Maximizing human welfare - anthropocentric • Substitutability - trade off

  3. Framework for Economic Analysis • Economic considerations • Equity considerations • Intergenerational effects • Sustainability of resource systems • Social risk aversion • Economic analysis is used to help organize available information • Economic analysis should not be the sole determinant of choices

  4. Economic Analysis for Water Resources: Legal Background • The Clean Water Act “Maximum extent practicable” Feasibility Efficiency Economic efficiency • Stormwater Management Professional judgement Cost effectiveness

  5. Types of Economic Analysis • Cost effectiveness At treatment site At receiving water • Comparison of benefits and costs Benefit cost ratio Net benefit

  6. Benefit Cost Analysis Background • 1950s: Corp of Engineers pubic works projects • 1960s: Growing awareness for public health, safety, and the environment National Environmental Policy Act of 1969 (NEPA) • 1970s: Clean Water Act • 1980s: Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) Principal and guidelines • 1990s: Oil Pollution Act

  7. Costs for nonpoint source pollution abatement • Capital costs • Operation and maintenance • Monitoring

  8. What are the benefits of nature? • Source of material input to the economy • Life support • Amenity services • Disposal of byproducts from economic activities

  9. How do we estimate environmental benefits? Methods are classified based on two characteristics: • Observed vs. hypothetical • Direct vs. indirect

  10. Observed direct valuation method • Referendum voting • Simulated markets

  11. Observed indirect valuation method • Travel cost method • Hedonic method • Cost of illness approach

  12. Hypothetical direct valuation method Contingent valuation method: • Bidding game • Open ended questions

  13. Hypothetical indirect valuation method • Referendum approach • Contingent ranking

  14. Benefit Transfer • Using results from existing studies for new application • Resources are limited • Large base of empirical studies exist

  15. Valuation Method Receiving Water Properties Feasible BMPs Identify Relevant Pollutants Pollutants Removal Efficiency Identify Beneficial Uses Existing Pollutant Conc. Estimate Unimpaired Value Pollutants Conc. with BMP Pollutant Conc. Threshold Develop Relationship between Beneficial Uses and Pollutants Estimate Change in Beneficial Uses Benefit and Cost Comparison BMP Cost BMP Benefit Value

  16. Beneficial Uses and Pollutant Concentration Relationship BENbmp = BENunimpaired*DMp 1 DCp Benefit Value Multiplier (Mp) DMp 0 Concentration (mg/L) Unimpaired Use Eliminated Use

  17. Beneficial Uses and Pollutant Concentration Relationship • Limited information!!!! • Variability of pollutants concentration • Distinguishing between the effects of stormwater pollutants and other environmental conditions

  18. Benefit and Cost Comparison of Available BMPs $ Cost of BMP Benefit of BMP (1) Min (2) (3) (4) Max Treatment Level

  19. Study of Ballona Creek Orit Wilchfort Jay R. Lund Dan Lew Doug Larson Department of Civil and Environmental Engineering Department of Agricultural and Resource Economics University of California, Davis

  20. Best Management Practices • Level 1: Detention and Screening • Level 2: Filtration with Disinfection • Level 3: Advanced Treatment - Reverse Osmosis

  21. Results(Single Agency Treatment Only) 24,873 17,116 15,062 $1000/year 38 36 20 Level 1 Level 2 Level 3

  22. Results(Basinwide Treatment) 418,672 262,170 168,166 $1000/year 1,644 1,613 1,492 Level 1 Level 2 Level 3

  23. The Value and Limitations of Economic Analysis • BCA is useful in assessing and solving stormwater problems • Provides grounds for learning about the watershed and the impacts of nonpoint source pollution on the receiving waters • Supports discussion of possible management solutions • Examines different levels of management options that may lead to economically favorable decisions for water quality management • Regional treatment of stormwater provides greater benefits than single agency treatment • Economic analysis should be part of nonpoint source management but should not be the only basis for decision making.

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