Paper Number: 2012-05

Document Date: 07/2012

Author(s): Patrick Walsh and William Wheeler

Subject Area(s): Economic Impacts

JEL Classification: Welfare Economics: Allocative Efficiency; Cost–Benefit Analysis; Externalities; Renewable Resources and Conservation: Water; Government Policy; Environmental Economics: Valuation of Environmental Effects; Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling; Government Policy

Keywords: valuation; water quality; cost benefit analysis

Abstract: The water quality index (WQI) has emerged as a central way to convey water quality information to policy makers and the general public and is regularly used in US EPA regulatory impact analysis. It is a compound indicator that aggregates information from several water quality parameters. Several recent studies have criticized the aggregation function of the EPA WQI, arguing that it suffers from “eclipsing” and other problems. Although past papers have compared various aggregation functions in the WQI (usually looking at correlation), this is the first paper to examine these functions in the context of benefit-cost analysis. Using data from the 2003 EPA CAFO rule, the present paper examines four aggregation functions and their impact on estimated benefits. Results indicate that the aggregation method can have a profound effect on benefits, with total benefit estimates varying from $82 million to $504 million dollars. Furthermore, a sensitivity analysis does not find convincing evidence to substitute the current aggregation function, although several changes to the underlying WQI methodology may be warranted.

This paper is part of the Environmental Economics Working Paper Series.

• Water Quality Index Aggregation and Cost Benefit Analysis (PDF)(26 pp, 395 K, 07/2012)