Groundwater Economics

Groundwater Economics Charles A. Job Lap) CRC Press \ ^ J Taylor Si Francis Group Boca Raton London New York CRC Press is an imprint of the Taylor & Francis Croup, an informa business

Contents Preface Acknowledgments Author xxi xxiii xxv PART I Introduction Chapter 1 An Introduction to the Economics of Groundwater 3 Background 3 Approaches to Economic Analysis Relative to Groundwater 6 Significant Groundwater Economics Issues 10 Initial Economic Concepts 20 Brief Overview of the Book 23 References 23 PART lla Context Chapter 2 Groundwater in the Ecosystem 29 Physical Significance of Groundwater 29 The Hydrologic Cycle 29 Natural Factors Affecting Groundwater Resources 33 Other Factors Affecting Groundwater Supply. 38 Groundwater Availability 38 Groundwater Quality 39 Groundwater Flow 42 Local/On-Site Flow 42 Watershed Flow 43 Regional Flow 43 Natural Sensitivity and Vulnerability 43 Regional Sensitivity 43 Local Sensitivity and Vulnerability 44 Human Activity and Ecosystem Vulnerability 46 Biodiversity in Groundwater 47 Ground and Near-Surface 48 Karst 48 First Aquifer 48 Littoral Zones 49 Deep Aquifer Environments 49 Note on Biodegradation 49 Groundwater Occurrence and Human Interaction 50 Wells 50 Springs 50 vii

VIII Contents Wetlands 50 Groundwater-Surface Water Interaction 51 The Water Budget 54 Groundwater and Climate Change 58 Summary: General Observations on Natural Factors Affecting Groundwater in the Ecosystem 58 Appendix: Hydraulic Conductivity 61 References 61 Chapter 3 Groundwater in the Economy 67 Groundwater's Influence in the Economy 67 Groundwater Availability 68 Groundwater Quality 70 Major Economic Groundwater Uses in National and International Contexts 72 International 72 United States 74 Irrigation 74 Drinking Water 75 Industrial 76 Per Capita Use 77 All Groundwater Uses 77 Groundwater Services Sector 77 Unintended Effects of Groundwater Use in an Economy 82 Ecological and Aesthetic Uses of Groundwater 84 Residual Absorption as a Use of Groundwater 84 Chemical Wastes 84 Pesticides 85 Competition for the Subsurface Environment 85 Health and Economic Productivity 85 Other Socioeconomic Factors in Overview 85 Economic Management Characteristics of Groundwater 86 Economic Challenges and Market Failure 88 A Model of Groundwater in the Economy 89 Groundwater Function and Service 90 Recycling and Reuse 92 A Simple Model 92 Expanded Ecosystems Services Model 94 Economic Effects on Groundwater from Climate Change 96 Implications for Sustainable Groundwater in the Economy 96 Summary 97 References 97 Chapter 4 Groundwater Access and Supply: Wells, Springs, and Green Management 101 Access Is Fundamental to Use 101 A Typical Well 101 Groundwater Resource Investigation 102 Elements of an Investigation 102 Analysis of Available Information 104 Cost of Investigation 104 Costs and Benefits of Groundwater Investigation 106

Contents ix Land or Property Entry 108 Factors Affecting Well Location 108 Well Permits 113 Well Drilling and Installation 113 Well Size 119 Private Domestic Wells 119 Monitoring Wells 119 Water Supply Well 119 Well Pumps, 120 Solar-Powered Pumps : 121 Wind-Powered Wells l..:..z7. 124 Other Well Types 124 Aquifer Storage and Recovery 125 Direct Benefits 125 Indirect Benefits 125 Heat Pump Wells 126 Hydraulic Fracturing Wells 127 Brine Production Wells 127 Springs 127 Dewatering 128 Geothermal Production 130 In Situ and On-Site Groundwater Treatment 130 Benefits of Properly Installed and Maintained Wells 131 Costs of Improperly Installed or Maintained Wells 132 Ecological Aspects of Access to Groundwater and the Subsurface 132 Unsaturated Zone and Shallow Aquifers 132 Rivers and Streams 133 Wetlands 133 Green Management 133 Water Source 133 Water Quality 134 Summary 134 References 135 Chapters Groundwater Law 137 A Complex Framework 137 Socioeconomic Considerations 137 Range of Uses Recognized in Law 138 Groundwater Quantity and Quality 138 Groundwater Mobility 139 Groundwater as Property 139 Groundwater Laws of the United States ; 140 State Groundwater Doctrines, Law, and Policy in the United States 140 Terminology for Groundwater Categories in Case Law 141 Subflow of Surface Streams 141 Underground Streams 141 Percolating Waters 141 Wastewaters 141 Water Quantity 142 Absolute Ownership 143 Reasonable Use 143

x Contents Correlative Rights Eastern United States (From the Restatement of Torts Rule) 143 Correlative Rights Western United States 144 Prior Appropriation 144 Management Area 144 State Groundwater Drainage Law 144 State Laws for Well Installation 145 Federal Groundwater Quantity Related Laws 146 Water Quality 146 State Law Affecting Land Management Practices with Groundwater Quality Implications 148 State Groundwater Quality Protection 148 U.S. Federal Groundwater Quality Protection Related Laws 150 Groundwater Quality Standards 151 U.S. Federal Wetlands Laws 154 U.S. Federal Environmental Valuation of Groundwater-Related Actions 154 U.S. Groundwater Financing Laws 155 Other Economic Implications of U.S. Groundwater Rights and Laws 156 Environmental Site Assessments 156 In the United States 156 Internationally 157 Groundwater Laws of Other Countries 157 Canada 157 Mexico 161 European Union 162 Muslim Countries 166 Comparison of Approaches 166 Conclusion 170 References 170 Chapter 6 Groundwater Consumption for Health and Food 173 Part 1: Groundwater and Health 173 Positive Health Effects 174 Negative Health Effects 175 Naturally Occurring Contaminants 178 Human-Caused or Anthropogenic Source Contaminants 188 Valuing Health Risks 194 Barriers Protecting Health 195 Source Water Protection and Contaminant Characteristics 195 Treatment of Groundwater 196 Groundwater Source Quality for Other Living Organisms 196 Groundwater Source Quality for Commercial Applications 198 Summary ': 199 References 200 Part 2: Groundwater and Food Production 201 Largest Use of Groundwater 201 Extent of Irrigation Water Demand 201 Biofuels Demand on Groundwater 204 Brief History of Groundwater Irrigation 204 Recent Developments in Irrigation Wells 204 Irrigation Wells in Use 205

Contents xi Land Area Irrigated 206 Irrigation Well Costs 207 Irrigation Methods and Costs 212 Irrigation Efficiency 216 Irrigation Use of Groundwater 216 Irrigation Productivity 216 Financing Irrigation Systems 218 Ecosystem Effects of Irrigation 219 Waterlogging and Salination 219 Depletion of Aquifers :. 219 Land Subsidence ~.~.~. 220 Accumulation of Salts, Nutrients, and Pesticides Residuals 221 Best Management Practices 223 Institutional Factors 225 Macroeconomic Considerations 225 Summary 226 References 226 Chapter 7 Groundwater Quality Treatment and Waste Disposal 231 Treatment for Drinking Water : 232 Household Treatment 232 Central Water Supply Treatment 234 Desalination 238 Subsurface Disposal and Release of Drinking Water Treatment Residuals 239 Watershed Management 239 Waste Releases to Groundwater and the Subsurface Environment 240 Onsite Wastewater Disposal 240 Underground Injection 240 Subsurface Releases and Modifications Associated with Global Climate Change 243 Carbon Dioxide 243 Sea-Level Rise and Saltwater Intrusion 248 Inland Brackish and Saline Water Intrusion 248 Desalination Wastes 248 Remediation of Chemical Residuals in Groundwater 249 Water Reclamation and Reuse 253 Economic Considerations for Groundwater in Treatment and Disposal 255 Summary 256 References 257 PART lib Reprise PART III Economic Fundamentals Chapter 8 Microeconomics and Basic Economic Relationships 269 Economic Utility, Price, and Product 269 Information Effects on Individual's Tastes and Preferences 272 Economic Utility Again 273

xii Contents Willingness to Pay 273 Demand 275 Benefits 276 Supply 277 An Example in Graphical Form 279 Monopolies and Supply 279 Price in a Competitive Market 281 Economic Efficiency 281 Assumptions Used to Derive "Competitive Markets" 281 Behaving Logically and Reasonably 282 Maximizing Self-interest..'. 284 Price Allocates Resources 284 Perfect Competition 285 Perfect Knowledge among Buyers and Sellers 285 Perfect Mobility of Goods and Productive Factors 286 Perfectly Elastic Supply of Productive Factors 286 Spontaneous Order and Efficiency 286 Substitutability of Inputs 286 Decision Makers in Groundwater Production 287 Decision Makers Affecting Demand for Groundwater 290 An Example 291 Discussion 292 Producer/Operator Decisions 294 Capital and Financing Aspects of Economic Production 295 Capital Financing 295 Discount Rate 296 Depreciation of Capital 297 Natural Capital 298 National and International Implications of Groundwater Production 299 Summary 300 References 301 Chapter 9 Cost, Benefit, Price, and Value of Groundwater in Market and Nonmarket Settings 303 A Framework for Categorizing Economic Results 303 Market Goods and Services 304 Market Failure 305 Nonmarket Goods and Services '. 309 Costs 310 Public Bads 312 Benefits 312 Price 313 A Generalized Pricing Model 316 Nonmarket Factors 318 Asset Value 319 Replacement Surcharge Pricing 319 Estimating o[f(i)], the Cost of Foregone Opportunities for Water Use 322 Price Elasticity of Demand for Water and Income Factors 325 Scarcity and Pricing 325 Underpricing 327

Contents xiii Pricing Methods 327 Institutions Facilitating Pricing 328 Average versus Marginal Cost Pricing 331 Full Cost Pricing 333 Values 333 Other Categories of Effects 336 Risk Reduction Benefits 336 Equity Effects 336 Summary 337 References '..' 337 Chapter 10 Macroeconomics 341 Macroeconomic Policy Activity 341 Macroeconomics in Overview 342 National Macroeconomic Functions 343 Macroeconomic Policy Development 345 Effects of Macroeconomic Policies 347 Example 10.1 Energy Production 349 Example 10.2 Water System Financing 349 Ecological Capacity in the Macroeconomy 350 Macroeconomic Models of the Economy 351 Groundwater Occurrence and Use (Again) 354 Basic Raw Material for Many Industries 356 Natural Capital 356 Natural Capital and Depletion 359 Macroeconomic Balancing and Policies 359 Macroeconomic Policy Goals and Principles 360 Goals 360 Principles 361 Macroeconomic Instruments 362 Distribution Effects 362 Convergence of Economic Models 363 Summary 364 References 365 PART IV Political Economy of Groundwater Management Chapter 11 Groundwater Policy 369 Groundwater Policy Types 369 Water Source Policy 371 Policies in High-Level Overview 371 Local Level 371 State Government 373 National/Federal Government 375 Economic Considerations in Water Source Policies 375 Contaminant Control Policy 377 Policies in High-Level Overview 377 Local Level 377

xiv Contents State Government 380 National/Federal Government 380 Economic Considerations in Contamination Control Policy 381 Criteria for Policy Evaluation 384 Ecosystem Scale 385 Positive Ecosystem Response 385 Equity 385 Economic Efficiency or Effectiveness 386 Dynamic Incentive 387 Low Information Requirements 387 Low Administration Cost...7 387 Agreement with Moral Precepts 388 Summary 388 References 389 Chapter 12 Economic Analysis of Groundwater Policy 391 Policy Evaluation 391 Note on Relation of Chapters 12 and 13 Addressing Economic Evaluation 391 Local Relational Policies 392 Ecosystem Scale 392 Property Rights and Liability Law for Water Sources 392 Property Rights and Liability Law for Contaminant Control 393 Community Information for Water Sources 393 Community Information for Contaminant Control 393 Positive Ecosystem Response 393 Property Rights and Liability Law for Water Sources 394 Property Rights and Liability Law for Contaminant Control 394 Community Information for Water Sources 394 Community Information for Contaminant Control 395 Equity 395 Property Rights and Liability Law for Water Sources and Contaminant Control 395 Community Information for Water Sources and Contaminant Control 395 Economic Efficiency or Effectiveness 395 Property Rights and Liability Law for Water Sources 395 Property Rights and Liability Law for Contaminant Control 398 Community Information for Water Source 400 Community Information for Contaminant Control 402 Remaining Criteria for Evaluating Local Relational Policies 404 Dynamic Incentive 404 Property Rights and Liability Law for Water Source and Contaminant Control 404 Community Information for Water Source and Contaminant Control 404 Low Information Requirements 404 Property Rights and Liability Law for Water Source and Contaminant Control 404 Community Information for Water Source and Contaminant Control 404 Low Administration Cost 404

Contents xv Property Rights and Liability Law for Water Source and Contaminant Control 404 Community Information for Water Sources and Contaminant Control 405 Agreement with Moral Precepts 405 Property Rights and Liability Law for Water Source and Contaminant Control 405 Community Information for Water Sources and Contaminant Control 405 Risk Management for Water Source and Contaminant Control 405 Ecosystem Scale 405 Positive Ecosystem Response 405 Equity.".'...7.7.7". 406 Economic Efficiency or Effectiveness 406 Dynamic Incentive 408 Low Information Requirements 408 Low Administration Cost 408 Agreement with Moral Precepts 408 Economic Instruments for Water Sources and Contaminant Control 408 Ecosystem Scale 410 Positive Ecosystem Response 410 Equity 410 Economic Efficiency or Effectiveness 411 Water Source User Charges and Taxes 411 Water Source Transferable Water Rights 413 Contaminant Control Policy Relying on User Charges, Taxes, and Penalties 415 Contaminant Control Policy Relying on Subsidies 420 Contaminant Control Policy Relying on Product Charges 423 Contaminant Control Policy Relying on Transferable Release Permits 423 Markets for Formerly Free Services 424 Remaining Criteria for Evaluating Economic Instruments 425 Dynamic Incentive 425 Low Information Requirements 425 Low Administration Cost 425 Agreement with Moral Precepts 426 Environmental Performance Standards 426 Ecosystem Scale 426 Positive Ecosystem Response 426 Equity 427 Economic Efficiency and Effectiveness 427 Water Source Quantity Limits 427 Contaminant Concentration Limits in Ambient Environment, Releases/Emissions, and Content 429 Remaining Criteria for Evaluating Environmental Performance Standards 434 Dynamic Incentive 434 Low Information Requirements 434 Low Administration Cost 434 Agreement with Moral Precepts 435 Another Perspective: Competition for versus Management of the Resource 435 Summary 438 References 440

xvi Contents Chapter 13 Cost-Benefit Information and Analysis 443 Background on Cost-Benefit Analysis 444 Types of Actions Affecting Groundwater 447 Questions Addressed 447 Guiding Principles 448 Evaluation Approaches 452 Impact Analysis 452 Cost-Effectiveness Evaluation 452 Life-Cycle Costs 457 Benefits Assessment 457 Benefits by Type of Action 458 Benefits of Actions Affecting Groundwater 458 Benefit Estimation Methods 465 Benefits Transfer 472 Cost-Benefit Analysis 477 Net Benefits Calculation 479 Quantifiable Nonmonetizable and Nonquantifiable Costs and Benefits 480 Costs and Benefits Considering Groundwater in a Hydrologic Cycle Context 486 Distribution Effects and Equity 490 Effects on Communities and Government Entities 491 Effects on Businesses 493 Environmental Management Effects 494 Efficiency Recharacterized Alternative Accounting 497 Cost and Benefit Estimate Issues 499 Inflation 499 Discounting and the Time Value of Money 500 Intergenerational Considerations 503 Lag Time between Costs and Benefits 503 Regional Variability 504 Regional Multiplier Effects 504 Risk and Uncertainty 506 Risk 506 Uncertainty and Sensitivity Analysis 509 Double Counting 509 Operationalizing Inherent Value 509 Information Completeness 510 Review of Key Groundwater Factors Affecting CBA 511 Summary 512 References 512 PART V Groundwater Future Chapter 14 Sustainable Development 519 Defining Sustainable Development 519 Defining Economic Growth 521 An Alternative Approach to Measuring National Production 521 Cautions on Cost-Benefit Evaluations 524 Natural Capital Shortage 524

Contents xvii Principles of Sustainable Development 524 Principles Applying to All Waters 524 Specific Sustainability Principles for Groundwater 526 Range of Alternative Approaches 528 Targeting Sustainable Groundwater Policies 530 Comprehensive Integrated Water Resource Management 533 Set Clear Aquifer Management Objectives 533 Source Water Protection 534 Restrictions on Chemical Use in Vulnerable Recharge Areas 536 Monitoring Groundwater Status..! 536 Use of Low-Impact Development '...'. 537 Widespread Use of and Incentives for Efficient Water-Using Technology 537 Water Recycling in Manufacturing 538 Water Reuse for Public Supplies 538 Full Cost Pricing 538 New National Accounting 539 Safe Yield and Sustainable Development 542 Maintain Capital, Maximize Service, Minimize Throughput 543 Who Benefits and Who Pays the Cost of the Different Policy Approaches and How Much? 543 Summary 544 References 544 Chapter 15 Transboundary, International, and Climate Change Considerations 547 Global Groundwater Use 547 International Aquifers A Shared Resource 547 Transboundary Issues 548 Costs and Benefits Related to Transboundary and International Groundwaters 551 Evolution of International Water Law 552 International Frameworks for Transboundary Groundwaters 553 Economics of Local Transboundary Aquifer Use 556 Effects of Climate Change on Groundwater, 559 Potential Effects Identified 559 In Coastal Areas 559 Across Continents 560 Implications for Nations, States, and Localities 560 Effects of Underground Storage of Carbon Dioxide 560 Economic Effects 560 Transboundary and International Factors 561 Aquifer Storage as a Climate Change Adaptation 561 Institutional Factors for Water Cooperation 561 Summary 563 References 563 Chapter 16 Groundwater in the Future Balance 565 Public Goods Are Undersupplied in the Marketplace 565 A Public Common Property Resource 565 Polluter Pays Principle 567 Resource Value Promoted by Government Action 567

xviii Contents More Resource Information for Setting Public Resource Objectives 568 Monitoring Is Essential 568 Physical/Hydrogeologic Relationships 568 Global Climate Change 569 Marginal Brackish Waters Becoming Essential 569 Maintain Natural Capital for Sustainability 570 Importance of Scale and Public Objectives 570 Accounting 571 Replenishment of Mined Aquifers 571 Pollution Prevention, Residual/Waste Reduction, and Counter to Cautionary Tax '. 572 Water Conservation and "Green" Management 573 Trade 573 Information Aids Communities in Valuing Groundwater 573 Aquifers and Watersheds Appropriate Management Units 574 Aquifer and Watershed Planning 574 Aquifer-Watershed "Footprint" as Basis for Use 575 Accounting Area of Interest 575 Economic Evaluation 576 Distribution of the Resource to All Who Rely on It 577 Intragenerational Equity and Distribution 577 Sustenance during Drought 577 Intergenerational Considerations 577 Efficient Allocation of the Resource 577 Efficient Resource Allocation Follows Natural Capital Decisions 577 Alternative Water Sources and Treatments 578 Overall Resource Protection and Allocation through Pricing Mechanisms and Tax Policy 578 Full Cost Pricing 579 Economic Effects beyond Points of Use 579 Property Transfer Site Assessments 579 Level Playing Field 582 Residuals Management 582 Residuals Trading 583 Benefits Analyses 583 Measure Efficiency Differently : 583 Ecosystem Significance in Community Values 583 Balancing Ecosystem and Community Values 583 Multiple Pathways to Valuing Groundwater 584 Value through Action in the Community 584 References 585 PART VI Case Studies Case Study 1: Production Well Costs and Benefits 589 References 592 Case Study 2: Economics of Groundwater Depletion 593 Background 593 Zarqa Basin 593

Contents xix Economic Analysis 594 Results 600 Discussion 602 References 602 Case Study 3: Groundwater Contaminant Remediation Economics 603 Background 603 Initial Groundwater Monitoring Results and Public Health Concerns 604 Alternative Emergency and Remedial Actions 604 Alternative 1 Hookups to the Rockford Public Water Supply 604 Alternative 2 New Residential Water Wells 605 Alternative 3 Point of Entry Water Treatment Devices 605 Alternative 4 No Action 605 Economic Analysis 608 Safe Water Supply 608 Long-Term Remedial Action 609 Soil 609 Groundwater/Leachate 609 References 610 Case Study 4: Wellhead Protection: Benefits and Costs 611 Background 611 Case Study: Middletown, Ohio (All Monetary Units Are in 1994 U.S. Dollars) 612 Contamination Response 612 Wellhead Protection 613 Discussion 615 References 616 Case Study 5: Economic Assessment of a National Regulation Waste Disposal Wells...617 Introduction 617 Cost Assumptions and Estimates 621 Cost Estimates 624 National Cost of the Regulation 628 Discussion 628 References 628 Case Study 6: Contingent Valuation of Municipal Water Supply 629 Background 629 Other Information about the Survey 629 Discussion 630 Reference 630 Case Study 7: Determining Water Rates 631 Water Rate Example: Fontana, California 634 Revenue Recovery Issues 638 Discussion 638 References 638 Case Study 8: Groundwater Valuation in Rural Settings 639 Benefits of Protecting Groundwater in Four Geographic Regions 639 Hedonic Pricing: Market Value of Groundwater Based on Crop Value 639

xx Contents Contingent Valuation of Option Price and Value for Groundwater in Cape Cod 640 References 640 Case Study 9: Wetland Benefits Evaluation 641 Introduction 641 Benefits Evaluation 642 Discussion 642 Reference 643 Case Study 10: Groundwater Sustainability to Balance Urban and Agricultural Needs 645 Background 645 Hydrogeologic Model 645 Analysis 645 Results 646 Discussion 646 Reference 646 Case Study 11: Balancing Ecosystem, Water Use, and Pricing 647 Background 647 Ecosystem Balance and Conservation 647 A Hypothetical Case: Does Water Conservation Pay? 648 Results 648 Purchase Groundwater Commodity 648 High-Efficiency Toilet and Showerhead, Including Labor for Installation...649 Cost-Benefit Comparison 649 Discussion 649 Conclusion 650 References 650 Index : 651