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Valuing Environmental Quality Changes Using Averting Expenditures: An Applica...Abdalla, Charles W.; Roach, Brian A.; Epp, Donald J.Land Economics; May 1992; 68, 2; ABI/INFORM Globalpg. 163
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164 Land Economics May 1992
the level of personal environmental qualityconstant, are equal to the benefits of a marginal pollution reduction. In reality, individuals will alter their personal environmental quality level as pollution is reduced.Ifpersonal environmental quality decreaseswith increases in pollution and pollutiondoes not directly enter into the utility function, averting expenditures are a lowerbound to willingness to pay. When pollution enters into the utility function directly,Courant and Porter stated that it is moredifficult to determine if averting expenditures bound willingness to pay.
Watson and Jaksch (1982) and Harford(1984), in studying the effect of air pollutionon personal or household cleanliness, developed theoretical models considering the"price" of a cleaning episode as a functionof pollution and cleaning frequency. Theirmodels indicated the need for empirical results to test assumptions of cleanliness andaverting expenditure behavior. Harringtonand Portney (1987) reported that the sum ofchanges in averting expenditures and costsof illnesses is likely to be a lower boundestimate of willingness to pay (WTP) , assuming individuals do not increase avertingexpenditures in response to a decrease inpollution. Also, they conclude that the possibility exists in principle to observe exactbenefits but obtaining the necessary information regarding market and household behavior normally prohibits the analysis.
Bartik (1988) also stated that theoretically correct measures of WTP could be estimated using averting expenditures if information was obtainable concerning thehousehold's production technology. In theabsence of such information, upper andlower bounds to WTP could be obtainedfrom averting expenditure information formarginal and nonmarginal changes in pollution. Rather than defining the cost of acleaning episode, Bartik's model utilizesthe defensive expenditure function basedon the household's choice of personal environmental quality. Bartik noted that the capability of averting expenditure estimatesto bound WTP is dependent upon the validity of several assumptions. In particular,averting inputs should not exhibit jointnessin the production of household outputs and
averting expenditures should not involvesunk costs in the purchase of durablegoods. If an averting good violates thejointness assumption, expenditures on thegood are theoretically divided among theproduction of each commodity involved.Violation of the sunk cost assumption alsoimplies that the full purchase price of thedurable good cannot be attributed to thechange in water quality.
Roach (1990) demonstrated that including household time as an input into the production function for personal environmental quality did not change Bartik's (1988)conclusions about the ability of averting expenditure estimates to bound willingness topay. Also, graphical analysis indicated thataverting expenditures will present a lowerbound to compensating and equivalent variation (CV and EV, respectively) based onreasonable assumptions. ShortIe and Roach(1989) extended the graphical analysis todemonstrate that averting expenditures arelikely to be a lower bound to CV and EVeven if pollution enters into the utility function directly. However, the bounds in thiscase will be less exact than when pollutiondoes not enter into the utility function directly.
Averting expenditure estimates appearto provide a conceptually valid conservative estimate of actual costs or benefits ofchanges in drinking water quality. However, averting measures may be difficult todefine for different types of pollution. Forexample, Watson and Jaksch (1982) included house painting and window washingas averting measures related to air pollution. These activities are likely to violatethe nonjointness assumption since theymay also be inputs in the production of"household appearance." Averting measures related to drinking water are easilydefined, such as buying bottled water or ahome water filtration system.
Some researchers including avoidancecosts in their studies have simulated averting behaviors and expenditures based onthe assumption that households did in factengage in such behaviors in response topollution. For example, Spofford, Krupnick, and Wood (1989) used prespecifiedprobability distributions to model house-
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68(2) Abdalla et al.: Groundwater Contamination 165
holds' averting expenditures in a study ofgroundwater remediation efforts at a federal Superfund site in Massachusetts. Others, including Smith and DesVousges(1986), Harrington, Krupnick, and Spofford(1989), and Abdalla (1989), have providedempirical evidence of household avertingexpenditures in response to water qualitydegradation.
In this study, averting expenditures wereused to approximate the economic costs tohouseholds in a southeastern Pennsylvaniacommunity affected by groundwater contamination. The estimates obtained are interpreted given the underlying theory andimplications for policy are discussed.
II. PROCEDURES
Criteria for selecting a community experiencing groundwater contamination included a minimum of 500 households connected to a public community watersystem, an expectation that the contamination incident would continue during the entire study period, and public notification ofcontamination. The borough of Perkasie insoutheastern Pennsylvania, which has anestimated 2,760 households (population7,877), was selected as an example of acommunity affected by groundwater contamination. In late 1987, Trichloroethylene(TCE), a volatile synthetic organic chemical, was detected in one of the borough'swells. TCE levels were as high as 35 partsper billion (ppb) , exceeding the Environmental Protection Agency's maximum contaminant level (MCL) of 5 ppb. Since notemporary solution was available to reduceTCE levels below the MCL, the countyhealth department required the borough tonotify customers of the contamination inJune 1988. As of December 1989, no solution had been implemented.
Mail questionnaires were used to elicitinformation about increases in householdaverting expenditures taken in response tocontamination in Perkasie. Householdswere asked about specific actions they tookto avoid exposure to TCE. This was an attempt to address the empirical estimationproblem of including expenditures for unrelated reasons, such as changes in tastes and
preferences. Since many of the behaviorsfor avoiding a water contaminant require aperson's time as well as purchased inputs,the amount of time required for averting actions and cash expenditures on averting inputs were sought. The time input was evaluated alternately at the minimum wage andat the estimated wage of the respondent.Information was collected about possiblefactors influencing averting expenditurechanges, such as health perceptions, attitudes, and demographic factors. Also, respondents were asked their quantitativeand qualitative cancer risk perceptions associated with the contamination incident.The survey instrument was developed andadministrated following procedures suggested by Dillman (1978).
Based on Kalton (1983), a random sample of 1,733 was determined to be neededfor representative results. A mailing list ofresidential customers was obtained and thesurvey was administered in September1989. After three follow-up mailings, 761usable questionnaires were received. Adjusting for nondeliverable surveys, the effective response rate was 46.9 percent. Theresponse rate was lower than anticipatedand it was felt necessary to investigate nonresponse bias. A telephone interview witha random sample of 50 nonrespondentswas conducted to determine if respondentsand nonrespondents were similar in keyattributes. Two variables from the mailquestionnaire sample and the telephoneinterview sample, awareness of TCE contamination and whether household avertingactions were taken in response to TCE,were statistically compared following amethod suggested by Snedecor and Cochran (1980). The hypothesis that the twosamples were different on these attributeswas rejected at the .05 level. Consequently,the mail survey results were concluded tobe representative of the Perkasie population.
III. AVERTING EXPENDITURES
Only 43.2 percent of Perkasie respondents were aware of TCE in their water despite mandatory notification of the contamination. Of these, 133, or 43.75 percent,
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166 Land Economics
TABLE 1ESTIMATED COSTS DUE TO TCE CONTAMINATION INCURRED BY PERKASIE
HOUSEHOLDS FROM DECEMBER 1987 TO SEPTEMBER 1989
May 1992
Category of Cost
I. Increased purchases of bottled water"2. New purchases of bottled water3. Home water treatment systemsd
4. Hauling water5. Boiling wate~
Total
Low Estimate ($)a
11,134.5417,341.954,691.46
12,512.7615,632.58
61,313.29
High Estimate ($)b
11,134.5417,341.954,691.46
34,031.4864,134.63
131,334.06
'Low estimate values lost leisure time at minimum wage ($3.35 per hour).bHigh estimate values lost leisure time at the estimated hourly wage. To estimate hourly wage.
the median value of the income category checked by each respondent was used as an estimate ofyearly income which was divided by 2.080 hours.
'An average bottled water cost of $0.83 per gallon was obtained by surveying retail grocers in thePerkasie area.
dThe useful life of a home water treatment system was assumed to be ten years (520 weeks). Sincethe 88-week study period represented 0.17 of a ten-year period. only 0.17 of the purchase price ofeach water treatment system was included in the estimate.
'Information was asked in the survey regarding the number of trips per week to haul water.round-trip distance. and how often the trip was for the sole purpose of hauling water. Averagetravel speed was assumed to be 35 miles per hour and the American Motor Vehicle ManufacturersAssociation indicates an average vehicle operation cost of 32.6 cents per mile.
'Respondents were assumed to use an electric stove for eight minutes to boil one-half gallon at atime. The electricity cost in Perkasie was 5.5 cents per kilowatt-hour.
undertook specific actions to avoid exposure after learning of TCE in their water.The actions included: (I) increased bottledwater purchases among households buyingit prior to the contamination, (2) bottled water purchases by new buyers, (3) installinghome water treatment systems, (4) haulingwater from alternate sources, and (5) boiling water. To avoid violation of the jointness in production assumption, respondents were asked to report only thoseactions taken as a specific response to TCEcontamination. The purchase of home water treatment systems violates the nondurale assumption, since the system providesbenefits lasting beyond the contamination.To overcome this problem, only a portionof the purchase and installation costs wereincluded in the estimates. The useful life offiltration systems was considered to be tenyears. Since the 88-week contamination period under study represented 0.17 of theuseful life of the system, only 0.17 of thepurchase and installation price was included in the estimates. Averting goodsmust also not exhibit jointness in production. A possible display of jointness in production is the purchase of bottled water.
The water may be purchased for taste aswell as health reasons. However, jointnessis less likely to exist in studying a contamination incident of a relative short duration.Consequently, the increase in bottled waterpurchases during the contamination incident is likely to be a direct result of theincreased health risks and not changes intastes and preferences.
The costs of these actions were calculated for the sample and extrapolated to thetotal population of Perkasie residents I (Table I). The total increase in expendituresfrom December 1987, when TCE was firstdetected, to September 1989 ranged from
I Because costs of the actual groundwater contamination episode were of interest, extrapolation to thetotal Perkasie population was based on the existinglevel of households' knowledge ofTCE. Thus, the lossestimate does not address the question of what losseswould have been if all households had informationabout contamination. Since we did not know howhouseholds that were unaware would behave once informed of TCE. estimation of losses with full information was not attempted. Loss estimates under such ascenario can be expected to exceed those obtained dueto the expectation that at least some of the householdsthat were unaware would have increased averting expenditures upon learning of TCE.
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68(2) Abdalla et at.: Groundwater Contamination 167
$61,313.29 to $131,334.06, depending onthe wage rate used to reflect the value oflost leisure time. 2 Given the theory reviewed in Section I, these values are interpreted as a lower bound estimate of theeconomic losses from TCE contamination.The average weekly increase in averting expenditures per household which undertookaverting actions in response to the contamination was $0.40.
IV. DETERMINANTS OF AVERTINGEXPENDITURES
Household averting behavior decisionsin Perkasie were considered as a two-stepprocess. The household's first step is to decide whether actions should be taken to reduce exposure to water contaminants.There are two possible outcomes as a resultof this step; either the household decidesthat the contamination is significant enoughthat actions should be taken or the contamination is not significant enough to warrantaction. Logit regression models were usedto determine factors influencing decisionsto undertake averting actions. The dependent variable was equal to 1 if the household took at least one averting action as aspecific response to TCE contaminationand equal to 0 if no specific actions weretaken (regardless of any previous actionstaken). The logit regression results in Table2 indicate that households were more likelyto take averting actions if they received information about TCE, rated the cancerrisks associated with the levels of TCE intheir water to be relatively high, and children ages 3 to 17 were present in thehousehold.
Only individuals who made the decisionto avert considered a second decisionstep-selection of the intensity of avertingactions. The estimated increase in household averting expenditures was used as anindicator of averting behavior intensity. Ordinary least squares regression modelswere constructed to identify factors influencing averting expenditure increases. Thedependent variable was the estimatedhousehold averting expenditure directlydue to the TCE contamination over the
Number of observations: 263R-Value: 0.296Percent correctly predicted by model: 70.3%
••• Indicates statistical significance at the 0.01 level.
Variable DescriptionsTCE RISK: Qualitative rating of the cancer risk associated
with the levels of TCE in the water (I = insignificant risk to5 = very serious risk).
TCE INFO: Addition of two qualitative integer responsesto the amount of information received or obtained concerningTCE (2 = no information to 10 = a lot of information).
CHILD 3-17: 0 if no children ages 3-17 were living in thehousehold, I if at least one child age 3-17 was present.
OTHER PROBLEMS: 0 if individual was not aware of problems in addition to TCE, 1 if aware of at least one additionalproblem.
CHILD UNDER 3: 0 if no children under 3 years of age.were present in the household, I if at least one child under 3years of age was present in the household.
GENDER: 0 if respondent was male, 1 iffemale.FAMILIARITY: Qualitative ranking of respondent's famil
iarity with chemical substances (I = not familiar to 4 = veryfamiliar).
88-week study period. Table 3 shows thathouseholds with children less than threeyears of age spent more as a result of theTCE contamination than those withoutyoung children.
While the explanatory power of the mod-
2Uncertainty about the cost estimates may be aresult of sampling error. The number of observationsobtained (761) fell short of the number that were calculated (1,136) for a representative sample of the population. Since this was lower than the desired numberof responses, follow-up telephone interviews with arandom sample of 50 nonrespondents were conductedto test for possible bias. The hypothesis that nonrespondents' and respondents' were different for twoattributes was rejected at the .05 level of significance.Despite this evidence that nonresponse bias does notappear to be present, sampling error cannot be completely ruled out.
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168 Land Economics May 1992
V. CONCLUSIONS
Note: Variable descriptions are the same as given in Table 2.•• Indicates statistical significance at the 0.05 level.
TABLE 3ORDINARY LEAST SQUARES REGRESSION RESULTS
FOR INTENSITY OF AVERTING ACTIONS FOR
PERKASIE HOUSEHOLDS AWARE OF TCE
CONTAMINATION
els is relatively low, the signs of the statistically significant coefficients were in the expected directions. The results are alsoconsistent with previous work. For example. the positive influence of informationabout environmental contamination received by households upon averting expenditures was also found by Swartz andStrand (1981).
tures included the presence of young children in a household and income levels. Results of this study imply that policy analystsshould consider using studies to measureaverting expenditures when examining policy alternatives. We have shown that measuring averting expenditures to estimate thecost of environmental pollution is conceptually valid and empirically feasible. In certain situations, it may be less expensive tomeasure averting expenditures than to develop estimates of pollution costs usingother methods. Drinking water contamination appears to be such a case. Where alower bound estimate of costs is sufficientto justify policy action, such as setting anMCL for a drinking water contaminant,there is no need for methods that are moreexpensive in time and money, even thoughthey may be more inclusive and thus provide a complete estimate of total costs.Failure of policy analysts to consider theuse of averting expenditure studies may result in more expensive or less timely decisions.
Another implication for policy thatemerges from this study draws on the finding that averting expenditures vary withhouseholds' qualitative perception of thehealth risk and knowledge of contamination. Risk communication strategies whichaffect perception of drinking water risksmay change the estimates of benefits andcosts of environmental policies which affect health.
A surprising finding of this study wasthat only 43 percent of Perkasie residentswere aware of the TCE contamination despite legislation which requires public water authorities to notify its customers ofcontamination. This significantly differsfrom the results of an earlier study (Abdalla1989) in which 96 percent of residential customers were aware of a contamination incident in central Pennsylvania. Thus, existingpublic notification rules and procedures appear inadequate to inform all affected customers.
Since awareness of contamination influences averting behavior, the policies andprocedures for public notification are also
0.642.21**1.161.02
t-Value
54.3364.7117.3037.56
Parameter EstimateVariable
INTERCEPTCHILD UNDER 3TeE RISKOTHER PROBLEMS
Number of Observations: 113F- Value: 3.16 (Entire model is significant at
0.01 level)R-Squared value: 0.12
Data on the averting expenditure increases of households in a Pennsylvaniacommunity was collected to estimate thecosts of a groundwater contamination incident. Averting expenditures were estimated to range from $61,313.29 to$131,334.06 during an 88-week TCE contamination period. Under specific assumptions, the change in averting expendituresassociated with a change in environmentalquality provides a conservative estimate ofthe true cost, or benefit, of the environmental change (Roach 1990). These assumptions appear to be reasonably appropriateto situations involving drinking water contamination.
Qualitative risk perception and knowledge of contamination are important determinants of households' decisions to undertake averting behaviors, while the factorsthat influence the level of averting expendi-
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68(2) Abdalla et al.: Groundwater Contamination 169
important factors affecting public realization of the costs. The regression resultssuggest that households may not be equallyconcerned with health risks posed by contaminants in drinking water. Notificationefforts could be intensified towards thosegroups which appear to be more concernedwith water quality. For example, households with young children tend to spendmore on averting activities related to wateruse. Notification programs targeted at parents of young children could be deliveredthrough child care centers or pediatricians'offices.
In light of the few studies documentingthe existence and nature of behaviors toavoid environmental contaminants, the results are significant. While the averting expenditure method does not encompass allimpacts, this study indicates that themethod is capable of yielding conceptuallyvalid estimates of an important category ofthe costs of environmental pollution.
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