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Environmental Valuation in Developed Countries

Case Studies

Edited by David Pearce

This is the second of two volumes of case studies that illustrate how environmental economists place values on environmental assets and on the flows of goods and services generated by those assets. This important book assembles studies that discuss broad areas of application of economic valuation – from amenity and pollution through to water and health risks, from forestry to green urban space. In this, his last book, the late David Pearce brought together leading European experts, contributors to some two dozen case studies exploring the frontiers of economic valuation of natural resources and environmental amenity in the developed world.
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Chapter 13: Valuing Water Service Level Changes: A Random Utilty Approach and Benefit Transfer Comparison

Kenneth Willis and Riccardo Scarpa


13. Valuing water service level changes: a random utility approach and benefit transfer comparison Kenneth Willis and Riccardo Scarpa INTRODUCTION Public regulation of water and sewerage companies is accepted because they are regional monopolies and because they create environmental externalities (through water abstraction and waste-water disposal). Moreover, their service delivery exhibits ‘public good’ elements (everyone on a supply network receives the same level of service). The economic regulator for water and sewerage companies in England and Wales is OFWAT (Office of Water Services). This government agency sets standards to which water companies must conform, and every five years sets prices that water and sewerage companies can charge their customers over the ensuing quinquennium. Water companies have to conform to legal minimum standards set by the UK government,1 and to EU Directives.2 The regulator OFWAT allows water companies discretion to vary service levels provided beyond these minimum standards, provided water companies can demonstrate to the regulator that benefits to customers and the general public exceed costs to customers. This study demonstrates the use of random utility models (RUMs) in evaluating water company customers’ preferences; and in estimating the benefits of changes in service levels associated with attributes of water supply, water quality and waste-water disposal, which exceed statutory minimum standards. The study also illustrates the importance of using RUMs to value non-statutory environmental improvements that water companies might be called upon to make by the Environment Agency (EA), which regulates environmental standards in England and Wales. 274...

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