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Environmental Economics Research at EPA

The discipline of economics views benefits as goods and services that increase personal well-being. An individual’s well-being or welfare is dependent not only on the goods and services provided through the economy as a result of activities by firms, households, and government agencies, but also on the status of the natural environment. The challenge for EPA has been how to measure the value to people of attributes of the natural environment, since with few exceptions these attributes are not bought and sold in markets.

The early environmental statutes were written under the presumption that the benefits of improving the environment clearly were more than commensurate with the costs that would be incurred. Thus one finds directive to the Administrator of the EPA to set national ambient air quality standards that protect the public health with an adequate margin of safety and for the EPA to have as a goal elimination of all discharges into the nation’s waters by 1985.

As time elapsed and the relatively straightforward environmental problems from point sources addressed, it has become clearer that the costs of improving the environment could consume a very large part of the nation’s productive wealth without achieving the goals of the principal environmental statutes.

Recognition that resources available for environmental improvement are finite led to a succession of executive orders of the president beginning in the 1970s to perform at least a rudimentary benefit-cost analysis for major regulatory actions. EPA’s Office of Research and Development initiated in early 1970s an effort to develop and improve techniques for measuring the benefits of environmental improvements. In 1979, the EPA created a Benefits Staff, later formalized as a branch within the Office of Policy Planning and Evaluation, to apply the methods and to help program offices perform the required economic studies.

The challenge of measuring benefits, particularly in economic terms, was recognized as a key problem for the agency and its ability to respond to requirements of Executive Order 12291. Since the late 1970s the agency has commissioned approximately 250 studies that explore theoretical and practical issues in the quantification of benefits. For the most part, the goal has been to express benefits in economic terms so that they can be compared with costs in purely economic terms. Because most of the cost studies conducted by the agency make no attempt to measure economic costs, the somewhat perverse result is that the agency now has much better information on what many of its programs and regulations are worth to society than what they cost.

Several of the reports in the EERM database deal with generic issues in benefits assessment. How to treat uncertainty, choosing the rate of discount, and dealing with intergenerational and distributional effects are prime examples.

The 1978 report Critical Review of Estimating Benefits of Air and Water Pollution Control (EE0177) by Hershaft, Freeman, Crocker, and Stevens offers an assessment of the state of the art for estimating air and water pollution control benefits. While the conceptual foundation for estimating benefits of pollution control is adequate in most respects, it is far ahead of the empirical efforts. The authors lay out a series of recommendations for future benefits estimation research.

The 1978 report Evaluation of Economic Benefits of Resource Conservation (EE0183) by Anderson asks whether the markets for natural resources lead to the socially optimal consumption of primary materials relative to the use of recycled materials. Many forces may act to create a divergence between market prices and the social costs of natural resources. These forces include resource taxation, monopoly, uncertainty and externalities. From a theoretical perspective, it is impossible to determine the net effect of the various forces, since they act in different directions. An empirical study for particular commodities could reveal the net effects.

The 1983 report Multimedia Benefit Assessment: A Proposed Workplan (EE0382) by EPA’s Office of Policy Planning and Evaluation is an ambitious plan to organize empirical knowledge of the environment in the United States. Its emphasis is on completeness, consistency and capturing the interactions between media. National totals are seen as sums of discrete regional totals. The envisioned computational framework consists of six sequential components: (1) residuals generation, (2) residuals modification and associated costs, (3) natural systems modeling analysis, (4) analyzing exposure to pollution, (5) estimating the physical effects of exposure, and (6) benefits of reducing residuals. The document states that the first two tasks “... are relatively straightforward because of existing inventories of sources and the analytical work of others.” The document includes a plan and schedule for accomplishing its objectives.

The Valuation of the Life Shortening Aspects of Risk (EE0297), a 1984 report by Harrington, reviews several theoretical models for valuing small changes in risk to life, such as life cycle models developed by Shepard and Zeckhauser, Cropper,and Arthur. The method is extended to the comparison of one life expectancy table with another, as in a program that would extend life expectancy. This allows an examination of issues such as the effects of age, the latency of risk, and alternative causes of death as they affect a life table. The approach also allows one to examine related issues such as the effects of wealth, discount rate and degree of risk aversion. The report shows how the method can be used to value the loss in consumer surplus for three causes of death: cardiovascular disease, fatal cancers, and motor vehicle accidents.

The 1984 report by Harrison, et al. entitled Research and Demonstration of Improved Methods for Carrying Out Benefit-Cost Analyses of Individual Regulations Vol IV Strategies for Dealing with Uncertainty in Individual Regulations (EE0269D) contains three papers. In "The Value of Improved Exposure Information in Benefit-Cost Analysis of Toxic Substances," John S. Evans develop a method regulators might use to decide if the collection of additional information at a cost is optimal prior to making a decision. Clearly, the value of the additional information must at least equal its cost of collection but this is not operational. Also clear is that uncertainty lies at the heart of this problem. The proposed method involves estimating the uncertainty in health risk estimates with and without additional information and calculating from the two estimates two corresponding expected opportunity losses. Evans recommends taking the lesser one. The general method is then refined and applied to the regulation of arsenic emissions at a smelter in Tacoma, Washington.

"The Value of Acquiring Information Under Section 8(a) of the Toxic Substances Control Act: A Decision-Analytic Approach," by Nichols, Boden, Harrison and Terrell is another paper in the Harrison et al. volume (EE0269D) about uncertainty and its antidote, information. Section 8(a) of the Toxic Substances Control Act permits the Administrator of the Environmental Protection Agency to promulgate rules requiring chemical manufacturers to submit detailed information about their specified products. The paper considers the use of that rule and other alternatives including gathering no further data. An 8(a) rulemaking, is a costly and time-consuming process, which may explain its infrequent use. The investigators conclude that a decision-analytic framework, which they outline, is the preferred approach. They also provide an 8(a) case study of ethylene dichloride.

In the 1988 report Discounting Statistical Lives (EE0156), Horowitz and Carson propose a survey approach for estimating the rate at which individuals discount statistical lives: offering respondents choices between life saving programs that differ in the timing and number of statistical lives saved. The proposed method is tested on 75 students.

The 1989 report Survey of Methodologies for Valuing Externalities and Public Goods (EE0263) by Hayden discusses six methods for valuing externalities and public goods related to natural resources: (1) general systems analysis; (2) the social fabric matrix; (3) direct cost; (4) contingent valuation; (5) travel cost; (6) the property approach. Several of these techniques are little known and require at least a brief explanation. General systems analysis is a body of principles that apply to all systems. Twelve of those principles are described to provide standards for judging the other methods as systems tools. The social fabric matrix is a tool to integrate diverse scientific findings and diverse data in order to describe a system. The property approach concerns the establishment and arrangement of property rights to deal with externality problems. How useful these novel approaches might be remains to be seen.

The full list of reports corresponding to this section is in the benefits subview of the subject view of the Environmental Economics Report Inventory (EERI) database and in the benefits subview of the subject view of the EPA/NSF Research Funding database.

This discussion of benefits is broken down into three categories in this report:

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