3.7.3.1 Direct Regulary Approaches.

The most frequently used approach to pollution control is

by government-imposed standards or targets for ambient water quality. These standards are
implemented by setting discharge levels for each type of pollutant, for each polluter or polluter
class. The environmental agency monitors compliance, and is often empowered to impose
penalties on violators. Several different approaches to specifying target discharge levels have
been tried (1) limits on maximum rates of discharge from a pollution source, (2) specified
percentage removal of pollutants from emissions, and (3) requirement to implement some
technology package (best available technology). Many believe that the regulatory approach
has proven to be an effective and equitable means for reducing pollution discharges and raising
environmental quality. The bargaining process that precedes the selection of exact control
packages has provided flexibility, and encourages voluntary compliance by polluters.
Regulatory agencies and legislatures are both comfortable with the approach.

However, economists have criticized direct regulator, approaches (e.g, Baurnol and Oates,
1988). One objection is that there is an inadequate concern for the costs of environmental
improvement. Modeling studies suggest that direct regulations provide more costly solutions
to pollution control than do other means,. In particular, incentive-based approaches are asserted
to be more likely to find the pollution discharge rate that minimizes the total cost to society.
More general objections arise from government failure, discussed in Sec 3.5. Regulations may
be poorly conceived, arbitrary, and manipulated for purpose unrelated to their original intent.

3.7.3.2 Economic Incentive Approaches. A general alternative approach to pollution control

regulation is decentralized incentives and disincentives. A key assumption of the incentives
approach is that social policy regarding pollution control should encourage the selection of the
set of pollution control options which yields the least cost to society, where pollution damage
costs, as well as residuals treatment costs, are both considered.

The effluent charge (also called an emissions or pollution tax), based on the polluter pays
principle, is one such option. The regulatory authority imposes a fee or tax on each unit of the
contaminant discharged. The charge might be set so as to represent the economic value of the
damages to third parties caused by the pollutant. (Economicsts refer to this as internalizing the
external costs, which encourages polluters toward achievement of economic efficiency.) The
unit charge would likely rise with increased levels of discharge. Polluters would, under the
emission tax approach, be free to respond to the charge as they choose. Firms with low unit
costs of reducing, pollution relative to the charge would presumably take steps to lower
discharges, so long as unit costs are less than the charge. Others might find it cheaper to pay
the tax than make the necessary pollution control expenditures. These incentives encourage
reducing pollution by the least-cost methods available, but all dischargers, would share the
costs of abatement to some degree. Moreover, all firms would find it in their interest to seek
chages in process technologies.
3.7.4 Nonpoint-Source Pollution Control Options

As progfress is made with point-source pollution control, attention turns to the selection and
implementation of control options for nonpoint-source pollution (NPSP). Nonpoint sources sre
now the major source of water pollution in the United States. They are thought to be responsible
for almost all suspended solids, and most oxygen-demanding loadings, nutrients, and bacteria
counts. Control of NPSP presents special difficulties. Sources are difficult to identify,
monitoring emissions presents daunting challenges and the fates of pollutants in the
environtment are uncertain (Tomasi, Segerson, and Braden, 1994 ; Malik, Larsen, and Ribaudo,
1994).

The great variety of sources, and the variety of nonpoint- source pollutants, contribute to the
difficulty. The primary source of nonpoint pollutants is the agricultural sector. Runoff from
farms and forests may carry with it suspended solids and sediments, dissolved solid and
chemicals (fertilizers-particularly nitrogen and phosphorus- and pesticides). Drainage waters
from irrigated lands in arid areas carry with them dissolved mineral solids (salinity), pesticides,
and nutrients. Urban storm drainage, leakage from buried fuel tanks, and subsurface and
surface mining are other major contributors . Other substances often occurring in diffuse source
runoff are oxygen-demanding organic matter, petroleum products, heavy metals, and fecal
bacteria.

Nonpoint-source pollution is also characterized by its episodic and random nature. Occasional
heavy rainfall or snowmelt events (over which the source has no control) typically are the
trigger, in contrast to the more even flow of discharges by point sources. These characteristics
of source type and timing imply that a variety of control technologies may be required for
effective abatement of this type of water pollution.

3.7.5 Other Issues Related to Water Quality

Other Important issues only recently receiving attention are monitoring and enforcement, and
the potential role of liability laws and the courts.

In a world of limited regulatory agency budgets, how much resources should be spent for
monitoring and enforcement of pollution discharge regulations? The environmental quality
control literature has largely tended to ignore considerations of monitoring and enforcement,
assuming that polluters will comply with whatever regulatory system is in place, regardless of
their own self-interest. However, when the probability of detections of violations is nonzero
and agents of the polluting organization can decide whether or not to risk detection problems
of monitoring and enforcement arise. The analysis of these problems has examined the
differential implications of the choice of policy instruments (charges versus standards), the
implicatios of marginal penalty structures, and the determination- in setting penalties for
violators-of whether merely negligence or strict liability is imposed on violators. See Russell,
Harrington, and Vaughn (1986) for a discussion and analysis of these issues.

A related topic is the increasing use of the courts-by private interests in addition to public
regulation-together with liability laws to improve environmental quality. As the standard
problem of point-source pollution has come under control, issues arising from accidental
pollution discharges, particulrary those from toxic substances, have received increasing
attention. Private lawsuits for damages can aughment the public agency regulation of water
pollution by obtaining court injuctions against polluting behavior by filing lawsuits claiming
tort liability for infractions of pollution standards. These potential actions provided further
disincentives to polluting behavior. (See the papaers collected in Tietenberg, 1992, for an
analysis of the role of environmental liability law).

3.7.6. Integrated Management of Water Supplies, Water Quality, and Watersheds

Water supply and water quality have typically been considered independently of one another.
It is increasingly clear that integrating the quantity and quality aspects of water management is
essential. Spulber and Sabbaghi (1994) have developed an elaborate formal economic
framework which integrates quantity and quality considerations. Their principal organizing
concepts are quality-graded demand and supply functions for water. A discrete set of water
supply and demand functions is envisaged, each representing a defined water quality. This
important extension from the traditional approach-of ignoring water quality-permits
simultaneous representation of both the quantity and quality dimensions in analyses of
intersectoral allocation issues. While the approach is theorectically quite attractive, no real-
world empirical implementation is attempted, and it remains to be seen if this will be a fruitfall
approach in practical policy analyses. Booker and Young (1994) reported an alternative
approach to integrating water quantity and quality. A combined hydrologic-economic
optimization model was developed for the Colorado River basin in the southwestern United
states. The main water quality problem is with dissolved mineral solids (salinity), which arises
naturally in runoff from the sedimentary rock formations in the watershed, and secondarily
from irrigation drainage waters. Salinity damage functions, for each subregion and type of use,
quantity the economic effects of quality degradations. The hydrologic model routes salinity
downriver, and the economic optimization model balances water quantity (including
hydropower) and quality considerations.

Because a hydrologic unit is a natural entity for managing water supply and qualitity, interest
has been renewed in the broader perspective for managing water supplies and environmental
quality. Beginning in the 1930s the United States government developed a planning and
implementation strategy for managing river basins for multiple-purpose outputs. Emphasis was
on water supply for irrigation, municipal and industrial water uses, floodplain management,
and power generation. By the 1960s, a concern for water quality became evident. Growing
problems of water pollution from nonpoint sources (particularly sediments and nutrients)
brought out the importance of incorporating land-use decisions into water management.

Integrated watershed management initially was employed to describe planning approaches

which focused simply on allocation and supply among competing water-using sectors. More
recently, the term has come to encompass the selection among water and land-use policy
options according to multiple policy criteria. Interdisciplinary approaches are essential. For
example, Easter, Dixon, and Hufschmidt (1986) present a conceptual framework emphasizing
an interdisciplinary, multiple-objective planning approach which integrates land use and water
management. The concepts are illustrated by case studies from Asia. Munasinghe (1992,
Chap.2) also conceptualizes integrated water resources planning as involving multisectoral,
multiobjective water policy.

3.8 ECONOMIC EVALUATION OF POLICIES FOR FLOODPLAIN MANAGEMENT

Throughout the world, floods each year bring about considerable damages to property and
disruption of economic activity, as well as causing injuries and deaths. By some measures,
floods cause more damage and deaths to humankind than do any other natural hazard (Rodda,
1995). In the United States, floods have caused and estimated average damages of $2 billion
per year over the past 30 years, and damages from the Mississippi Valley floods of 1993
exceeded $12 billion. Even so, on the average, flood damages represent a minuscule impact on
the U.S economy (Shabman, 1988).

So as to make the best use of valuable floodplains and to reduce losses to their citizens
government expend resources to change flow regimes and adopt policies to influence behavior
of floodplain occupants. During recent years, it appears that economists in the United States
have taken relatively less interest in the policy issues posed by flooding than they have in water
allocation and water quality issues, although a continuing program is evident in the United
Kingdom (Penning-Rowsell, Parker, and Harding, 1986; Penning-Rowsell and Fordham,
1994).

Several elements of the theory market limitations discussed in Sec. 3,4 provide the economic
justification for public policy to mitigate damages from natural hazards such as floods
(Milliman, 1983). Basinwide actions designed to reduce damages from floods are classic
instances where markets would be inadequate in achieving optimal resource allocation. The
extent of flood hazard in downstream areas in influenced by land use and water-channeling
decision made upstream, often in another state or nation, so public coordination at the regional,
national, and often, international level is essential for efficient mitigation of these externalities.
Another justification for public intervention is the publics imperfect knowledge regarding the
actual risks of low-probability/ high-consequence flood events. A public agency may be better
able to evaluate tradeoffs regarding risks than the individuals that experience them. More
generally, public flood management programs produce benefits which tend to be nonrival in
consumption and exhibit high exclusion costs; once flood control services are produced, all
floodplain occupants have access to those services, and individuals residing or conducting
business on a floodplain cannot be readily excluded from enjoying floodplain management
benefits.

The following discussion will address several/ issues: the economic optimum of public
spending directed toward floodplain management, the institutional arrangements for moving
toward that optimum, the approaches taken by economists in understanding the behavior of
floodplain occupants, and methods of measuring benefits of flood hazard mitigation.

3.8.1 The Optimal Allocation of Resources to Floodplain Management

Economic evaluation of floodplain management policies was given impetus in the United
States by language in the Flood Control Act of 1936, which assets that benefits to whomsoever
they may accrue must exceed the costs. Therefore, the economic approach follows the general
BCA principles (discussed in Sec. 3.4.2) of balancing benefical effects against adverse effects,
focusing on the tradeoffs associated with purchasing additional risk reduction. Distinctive
aspects include a probabilistic element in the evaluation of benefits, reflecting the uncertainty
of flood events. Also-as in the case of the pollution control model discussed in Sec.3.7- benefits
of flood damage mitigation are measured in terms of willingness to pay to avoid damages. The
basic economic model of natural hazard management hypothesizes that a rational, fully
informed floodplain occupant would be willing to pay up to the present discounted expected
(probability-weighted) value of losses, in order to avoid potential losses. The expected losses
typically decline rapidly with initial levels of expenditure, but level off, as additional damage
reduction is more difficult to attain. Flood hazard adjustments are subject to diminishing
expected marginal returns, because they protect against the most frequent events. Mitigation
costs tend to rise at an increasing rate with increased degrees of mitigation. Costs of protection
tend also to be nonlinear. In the case of structural adjustments to floods (such as dams and
levees) the volume (hence costs) is a power of the height, so additional protection is obtained
at disproportionate expense.

3.8.2 Measurement of Economic Costs and Benefits of Flood Mitigation

Estimation of costs of floodplain management policy evaluation presents few concerns unique
to the issue. Two topics will be mentioned here. One has to do with adequately accounting for
certain opportunity costs or external costs of floodplain management policies. For example,
evaluations of public flood hazard mitigation policies have sometimes not adequately
accounted for foregone nonmarketed benefits, such as the value of the wetlands drained
(Penning-Rowsell, Parker, and Harding, 1986). External costs have also been overlooked.
Stavins and Jaffe (1990) found that in the Mississippi Valley, public flood management policies
unintentionally, and contrary to federal policy, contributed to a substantial amount of private
conversion of forested wetlands to agricultural uses.

A second issue concerns the risk of failure of high-hazard dams. While dam failure is not
limited to flood control structure, the issue has much in common with flood hazard mitigation
and has been analyzed in this context. Conventional water-project evaluation has tended to
ignore the risk of structural failure brought about by events which exceed the design limits of
the dam. Failure of a dam would likely result in several types of costs, including damage to
property downstream, and income losses, as well as the foregone benefits of hydropower,
irrigation, or flood control. The sum of these costs, weighted by the probability of failure,
should be accounted for in water-project evaluation, or flood control structures are
underdesigned and their benefits overstated (Cochrane, 1989). Ellingwood, et al. (1993),
attempt an estimate of the cost of dam failures based on several actual cases.

The methods for estimating the economic benefits of flood risk reduction are similar to those
used in othrer contexts, but because of the problems of the publics imperfect knowledge of
flood probabilities and likely damages, and the potential for intangible impacts including the
risk of death, their application presents a number of difficult and contentious aspects. Howe
and Cochrane (1992) provide a conceptual discussion of the process of estimating probable
damage functions for natural hazards, including floods.

The principal technique for estimating urban flood risk reducation benefits has been the
property damage avoided (PDA) approach, which reflects the present value of real (inflation-
free) expected property damages avoided by the project or policy. The replacement and repair
costs to buildings and other property and structures, with and without the flood hazard, is
estimated for each of a number of river flow levels. The estimated annual benefit for a given
flow level is the difference between reapair costs. Each flow is weighted by its probability of
occurance, and the benefits over all flows summed to estimate expected benefit for each year.
The annual benefits must be estimated for each year of the planning period, incorporating
predicted changes in economic activity on the floodplain over time. More detailed descriptions
of the approach can be found in the U.S Water Resources Council (1983), or Penning-
Rowsdell, et al., (1992, Chap.5.).

3.8.3 Policy Options for Flood Hazard Mitigation

The Economic approach to flood damage migration policy owes much to the writings of the
geographer Gilbert White and his associates ( e.g. Burton. Kates and White, 1993). Whites
natural hazards paradigm stresses the linkages between human use of the environment and the
uncertain events flowing from the processes of natural systems. The interaction of extreme
events with human activities produces hazards and influences responses to them.
Acknowledging that floods are acts of nature, but contending that flood losses are largely due
to acts of humans. White began urging the need for altered policies nearly 50 years ago. Strict
emphasis on structural approaches to flood control should be superseded by a broader concept
of floodplain management. Individuals should be encouraged to take action to reduce flood
damages to complement structural approaches by public agencies. White proposed regulatory
policies (such as zoning and other land-use controls) and cconomic incentives (subsidies and
insurance) designet to influence flootplain occupants to take location and construction
decisions to mitigate potential flood damages.