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Environmental Economics Research at EPA

As applied to morbidity, the damage function approach measures the benefits of reducing pollution in three steps. First, estimate a physical damage coefficient that links environmental quality to non-fatal human health effects. Second, estimate the number of health effects by examining the population exposed and the physical change in environmental quality. Third, multiply the number of health effects by a unit value for each type of effect. The number of adverse effects is calculated making no allowance for the admittedly difficult to assess behavioral changes due to pollution (e.g., staying indoors less as pollution levels are reduced). The unit cost of adverse effects is obtained using lost wages, medical treatment costs, and other avoided costs.

The damage function approach for valuing morbidity has two problems, one conceptual and one practical. The conceptual problem is that averting behavior is not modeled explicitly, so the costs of averting behavior tend to be overlooked or beyond the scope of the damage function approach. Consider a situation where individuals stay indoors and take medication to prevent an asthma attack that they might have if they ventured outside on polluted days. Since there is averting behavior but no damage in the current situation, what would be the benefit to these individuals of cleaning the air so that they could venture outside safely on any day they chose? The damage function approach does not say.

The practical problem is that unit costs for morbidity effects usually are measured in terms of avoided medical outlays and wages, which likely underestimate what people would be willing to pay to avoid the adverse health effects in question. Only in the last fifteen years have researchers developed and tested stated preference methods for estimating the willingness to pay avoid morbidity effects. Even now, many important morbidity effects are poorly studied from the willingness to pay perspective. The cost of illness approach is much more common in valuing chronic illness. Consequently, benefit estimates based on a damage function approach continue to be used in many applications by EPA.

The Health Costs of Air Pollution (EE0179), prepared for the American Lung Association by Herman, reviews 23 studies on the health costs of air pollution published between 1967 and 1977. The studies focused on one of more of the following criteria air pollutants: sulfur dioxide, particulate matter, nitrogen dioxide, hydrocarbons, carbon monoxide, and photochemical oxidants. The estimates of damage ranged from a few hundred million dollars to about ten billion dollars in a few cases. The estimates are believed to be biased downward in that only well known health effects are valued, most studies used a cost of illness and lost wage method for valuing effects, and many important air pollutants were excluded.

Among the many EPA-funded studies that estimate values for various illnesses, some of the more important ones will be noted. A 1984 report by Chestnut and Violette Estimates of Willingness to Pay for Pollution-Induced Changes in Morbidity: A Critique for Benefit-Cost Analysis of Pollution Regulation (EE-0231A,B) reviews thirteen studies that valued a range of morbidity effects. The studies ranged from cost-of-illness to contingent valuation. Studies that developed a health production function and a health status index did not lead to monetary estimates of value.

Measuring the Benefits of Reduced Exposure to Particulate Matter and Nitrogen Dioxide in Children (EE0082) by Cropper and Sussman (1984) outlines how to determine the benefits of reducing children’s exposure to two air pollutants. The authors argue that children are an especially interesting group for an epidemiological study because they may be more sensitive and may receive bigger doses for a given exposure. Further, children are not occupationally exposed, they do not spend as much time in transit and cigarette smoke is less of a factor. The potential benefit of reduced exposure is better health both immediately and later in childhood. The value of that benefit is limited to reduced medical expenditures. The document describes the health, exposure, and economic data needed to perform the study. Also, a formal model of parents’ demand for child health is provided.

Tolley and Babcock, Valuation of Reductions in Human Health Symptoms and Risks (EE0092A-E), produced a series of reports in 1986 that review other literature that uses cost of illness, averting expenditures, the household production function approach, contingent valuation, and hedonic property value analysis to derive values for health effects that could be caused by criteria air pollutants. The last document in the series produces high, low and ‘medium’ ‘interim values’ for various acute and chronic effects. The ‘medium’ estimate for different acute effects range in value from $25 to $125 per day, while chronic effects range from $8,000 per day of uncomplicated angina to $60,000 per year for non-fatal cancer.

In the 1986 study Oxidants and Asthmatics in Los Angeles: A Benefits Analysis (EE0218A-C), Rowe and Chestnut compare cost of illness measures with stated willingness to pay to prevent angina symptoms. Using panel data from a sample of 82 asthmatics living in the Los Angeles area, the authors derived an estimated willingness to pay of $401 to reduce bad asthma days by one-half (37 day reduction), versus variable medical costs of $272.

The 1987 report entitled Economic Benefits of NOx Control: Design and Application for the Eastern U.S. (EE0071) by Rowe describes an effort to model the physical effects and resulting economic benefits from controlling NOx emissions. The model is computerized and is built on the substantial body of earlier research. With the model built, the investigator applied it to the case of reducing emissions from eastern power plants. Benefits of diminished emissions included human health and welfare through diminished ozone formation when NOx reacts with volatile organic compounds and through the direct effects of NO2. The quantified effects include human health, visibility, materials damage and agriculture.

Exposure to carbon monoxide can trigger angina symptoms in individuals with heart disease. Consequently, what people would be willing to pay to avoid angina symptoms would be a key element of any evaluation of policies to limit ambient carbon monoxide levels. Chestnut and coauthors' Heart Disease Patients’ Averting Behavior, Costs of Illness, and Willingness to Pay to Avoid Angina Episodes (EE0010A,B) examines a group of 50 males living in the Los Angeles area with ischemic heart disease (artherosclerotic disease of the coronary arteries that restricts blood flow to the heart muscle). Annual out-of-pocket medical expenditures due to heart disease averaged $256 per person for the 50 subjects in the study. The mean value of willingness to pay averaged $41 per month. Defensive expenditures averaged $2,151 for the 21 subjects who hired services of purchased goods to avoid an attack. This research also appeared in a journal article.

Valuing Chronic Morbidity Damages: Medical Costs, Labor Market Effects, and Individual Valuations (EE0224) by Krupnick and Cropper describes an effort to (1) estimate the per person medical costs of certain chronic health effects (namely coronary heart disease and chronic obstructive lung disease), (2) estimate the effect of these health conditions on labor force participation, and (3) estimate the willingness of individuals to pay to avoid these chronic health conditions. This report discusses the results for the first two objectives and outlines plans to accomplish the third. The authors found that subjects, all of whom had one of the conditions, could not respond meaningfully to the original WTP question that asked them what they would have been willing to pay to avoid the chronic health effect before they got it, given the knowledge they now have of what the effect is like.

The 1987 report Reconciling Averting Behavior and Contingent Valuation Benefit Estimates of Reducing Symptoms of Ozone Exposure (EE0285G) by Dickie, Gerking, Brookshire, Coursey, Schulze, Coulson and Tashkin attempts to reconcile differences between contingent valuation and averting behavior methods for estimating the willingness to pay to avoid various symptoms of ozone exposure, including chest thghtness, throat irritation, headache, and pain on breathing deeply. Contingent valuation bids to avoid one day of these symptoms typically exceeded averting behavior estimates by a factor of five to ten. The reconciliation approach asked respondents in a cv survey to revalue their bids after their original bids were extrapolated to a monthly outlay based on frequency of occurrence. The adjustments made by respondents were surprisingly large; original bids to avoid one day of headaches averaged $178 and one day of cough $355, whereas the revised bids averaged just $1.19 for each symptom.

The EPA has recurring needs for estimates of the per-ton benefits of controlling ozone precursors. Preparing Regulatory Impact Analyses for new ambient air quality standards is one such need; industry-specific emission standards are another; and program-wide comparisons of benefits and costs is a third such need. In the 1985 paper The Economic Benefit of Controlling Volatile Organic Compounds and Nitrogen Oxides: A Generic Approach (EE0068) by McGartland and Ostro, the authors derive estimates for the benefits of small (1%) changes in emissions of VOC and NOx, using first a production function for ozone that is based on VOC and NOx as inputs, and subsequently the impact of ozone on human health, vegetation, materials and other items. The estimated benefits of controlling one ton of VOC in metropolitan areas ranged from $241 to $656, while the estimated benefits of controlling one ton of NOx ranged from a negative $168 to a negative $64. NOx control had negative benefits in this study because NOx reductions generally caused an increase in ozone levels in urban areas according to the models.

Two reports concern human exposure to lead. Costs and Benefits of Reducing Lead in Gasoline: Final Regulatory Impact Analysis (EE0034) develops estimates for the public health benefits of reducing lead in gasoline. Chapters 2 and 4 of Levin's Reducing Lead in Drinking Water: A Benefit Analysis (EE0344) estimate the public health benefits of reducing lead concentrations in drinking water. Reducing Lead in Drinking Water: A Benefit Analysis was prepared as an integral component of a regulatory impact assessment for a proposed EPA rule on lead in drinking water The report estimates public health and materials damage benefits from reducing lead in municipal drinking water supplies. Levin estimated the benefits (in 1985 dollars) from reducing exposures by lowering the maximum contaminant level (MCL) from 50 ug/l to 20 ug/l would be between $900 million and $1.1 billion annually, split nearly evenly between health and materials effects. This compares with estimated costs of $230 million annually.

Meta Systems' 1985 report A Methodological Approach to an Economic Analysis of the Beneficial Outcomes of Water Quality Improvements from Sewage Treatment Plants Upgrading and Combined Sewer Overflow Controls (EE0047) uses a variety of economic techniques to estimate the benefits of water quality improvements in Boston Harbor that would result form upgrading two sewage treatments plants (Deer Island and Nut Island) and controlling combined sewer overflows (CSOs) in Dorchester Bay, the Neponset and Charles Rivers, Quincy Bay and the Inner Harbor.

The report values several benefit categories: swimming, recreational fishing, and intrinsic and aesthetic benefits. The report was not able to monetize commercial fishing benefits due to the difficulty of assessing pollution impacts on migratory species. Further, health benefits include only the reduction in risks of swimming in water contaminated with fecal coliform and the consumption of similarly-contaminated shellfish. Risks to health from bioaccumulation of toxics in fish and shellfish tissues were not assessed. Finally, the report made no attempt to assess ecological benefits related to restoration of water quality in Boston Harbor.

The study relied on a variety of methods for estimating benefits.
recreation - swimming: travel cost, unit value and regional participation, beach closings
recreation - boating: unit value and regional participation
recreational fishing: unit value and regional participation
health - swimming: dose-response function (disease incidence)
food contamination: dose-response (disease incidence)
intrinsic benefits: contingent valuation

For Dorchester Bay, Neponset Beach and the Constitution River, estimated benefits exceeded estimated costs. The benefits for controlling Quincy’s storm sewer effluent most likely exceeded costs. However, for the Charles River Basin, estimated costs exceed benefits.

The full list of reports corresponding to this section appears in the benefits analysis - valuation - cost of damages avoided - morbidity subview of the subject view of the Environmental Economics Report Inventory (EERI) database.

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