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2.3.2. Benefits: Damage Avoided

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Environmental Economics Research at EPA

Many of the early studies of the costs of pollution in the environment employed what is termed a “damage function” approach. The method involves first the estimation of a relationship between pollution and physical measures of damage to say certain crops, structures or health. A second step multiplies the quantity of affected items (acreage of the affected crops, number of inhabitants of a polluted city) by the damage coefficient to estimate the number of adverse effects. A third and final step multiplies by an economic value per unit of effect. Freeman’s 1979 report to EPA The Benefits of Air and Water Pollution Control: A Review and Synthesis of Recent Estimates (EE0048) summarizes much of this early literature.

One of those very early reports is The Economic Damages of Air Pollution (EE0025), by Waddell (1974), which enumerates and evaluates six methods for valuing air pollution damages: (1) technical coefficients of production and consumption; (2) market (hedonic) studies; (3) opinion surveys of air pollution sufferers; (4) litigation surveys; (5) political expressions of social choice; and (6) the delphi method. The technical coefficients method produced “best” damage estimates for 1970 of $4.6 billion for health, $1.7 billion for materials and $.2 billion for vegetation. A property value approach produced a “best” damage estimate of $5.8 billion for aesthetics and soiling. The overall “best” estimate is $12.3 billion with a range of $6.1 - 18.5 billion. The paper also attempts to allocate the damages by pollutant and source.

National Damages of Air and Water Pollution (EE0085) by Heintz, Hershaft and Horak and dating from the late 1970s estimates the benefits that might be realized from environmental abatement. This document compiles, updates and aggregates the results from a number of studies to produce overall estimates. Estimates are for 1973. “Best estimates of air pollution damage are developed for the following categories: human health, $5.7 billion; aesthetics, $9.7 billion; vegetation, $2.9 billion; and materials, $1.9 billion. The total best estimate for air pollution damages is $20.2 billion with a range of $9.5 to $35.4 billion. “Best estimates of water pollution damages are developed for the following categories: outdoor recreation, $6.5 billion; aesthetics and ecological impacts, $1.5 billion; health damages, $.6 billion; and production losses, $1.7 billion. The total best estimate for water pollution damages is $10.1 billion with a range of $4.5 and $18.7 billion.”

Building upon earlier work by Freeman and the Public Interest Economics Foundation, the 1984 report National Aggregate Benefits of Air and Water Pollution Control (EE0286) by Randall and Bloomquist seeks to develop an improved measure of the national benefits of air and water pollution control. Certain deficiencies in the previous studies are analyzed, particularly the assumption that the benefits of each policy component of environmental regulation are additive in nature (independently valued and summed). As Randall and Blomquist point out, the proper measure of each type of benefit should use a sequenced implementation baseline and measure benefits of each new policy component relative to that baseline.Using the independent valuation and summation method, the authors estimate the benefits of a 25% improvement in national air and water quality at $141 billion annually. Using their preferred alternative technique of piecewise aggregation, the same national air and water pollution control benefits would be $131 billion.

A problem with the damage function approach is that is not integrated into standard welfare economics. Suppose pollution reduces the yield of cotton in California. The damage function approach would multiply a damage coefficient obtained from an agricultural experiment station or from field studies in California by the number of acres planted to cotton and then multiply this result by the market price of cotton. The correct approach would consider opportunities for farmers to change crops or to amend the soils with fertilizer. Further, an increased cost of producing cotton caused by pollution should be modeled as a shift upward in the supply of cotton, which in turn affects the point at which supply intersects demand, the area under the demand curve (consumer surplus), and the producer surplus earned by farmers.

The condition under which the damage function approach provides a conceptually correct result is somewhat restrictive, namely that there is no impact on market price due to changes in the cost of production that result from environmental improvements. This would hold, for example, if the firms that benefit from an improvement in environmental conditions have only a small share of industry output or if prices are set largely on world markets so that the benefits of an environmental improvement are captured solely by domestic producers.

While the damage function approach has its limitations from a methodological perspective, it continues to be used on a selective basis where small changes in output are involved and market prices largely unaffected. This could include many agricultural and industrial activities. You can see the full list of reports corresponding to this section in the benefits analysis - valuation - cost of damages avoided subview of the subject view of the Environmental Economics Report Inventory (EERI) database.

Other sections in this report examine in more detail studies sponsored by EPA that apply the damage function approach to:

labor productivity
resource and environmental harms
materials and others

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