WSP02976

• File Number: 8271.300
• Description: Colorado River Basin Salinity Control Program - General Information and Publications-Reports
• Basin: Colorado Mainstem
• Water Division: 5
• Date: 12/1/1979
• Title: An Economic Evaluation of the Salinity Impacts From Energy Development - The Case of the Upper Colorado River Basin
• Water Supply Pro - Doc Type: Report/Study

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Literature Review

II. EGONOMIC ANALYSIS

This section presents a framework fot
economic analysis that can be applied to
resolve the water quality issues arising from
energy development possibilities in the Upper
Colorado River Basin. The method explicitly
examines the effect of water reallocation in
the basin in order to provide criteria for
selecting the minimum cost combination of
measures for maintaining any desired salinity
standards. Rules for achieving optimal
salinity levels are outlined based on CQst-
benefit analysis.

Externalities from Water Pollution

Deterioration o.f water quality is a
nationwide problem In the United States.
Public Law 92-500, the Federal Water Pollu-
tion Control Act Amendment of 1972, is
evidence of the public's growing awareness of
water quality problems. Water pollution
reduces the productivity of water and hence
imposes higher costs on downstream users. It
is a classic example of a technological
external diseconomy. When Pareto relevant
technological externalities exist, misallo-
cation of resources will result.

Controlling waste discharges (or resid-
uals) has been the major strategy for im-
proving water quality, but it is not the only
available alternative. Pollution damages are
a function of concentration rather than just
the total amount of wastes discharged. Total
dissolved solids (TDS) or salinit-y per unit
of water may be reduced either by reducing
discharges or increasing flows. Additional
upstream water depletions may have detri-
mental effect on downstream water quality.
Water allocations to upstream users will not
be optimal if damages to downstream users
resulting from upstream water depletion are
not taken into consideration. Furthermore,
improving water quality by controlling waste
discharges alone will result in a nonoptimal
solution. Perhaps because of the traditional
separation between water supply planning and
water quality management in the United
States, none of the policies evaluated for
salinity control have explicitly studied
reducing both upstream, water use and waste
discharges simultaneously. Procedures for
integrating applications of economic criteria
to both s i tuat ions are needed to gu ide the
allocation of water resources to achieve the
socially optimal solution.

Technological externalities cause di-
vergence between social and private welfare.
In his classic work on how to remedy this
situation, Pigou (1932) proposed a tax and
subs idy (bounty) scheme to correct external-
ities. The scheme would levy a tax on parties
imposing external diseconomies and pay a
subsidy to damaged parties. Coase (1960),
Buchanan and Stubblebine (1962), and Turvey
(1963) argued that taxes and subsidies
are unnecessary if two parties voluntarily
negotiate for their mutual advantages. The
voluntary arproach has been criticized
s tron~dy in i t@ assumpt ions and appl icat ion
to the real world (Arrow 1969, Dolbear 1967,
and Dick 1976). Pigouvian tax and subsidy
systems are costly and difficutt to apply
when externalit. ies involve large groups of
polluters and pollutees. To avoid the
difficulty of using the Pigouvian tax alone
as an instrumeot for controlling pollution,
Baumol and Oates (1971) suggested it be used
to achieve preselected environmental quality
levels. They claimed that a uniform tax
would require less information.

Hass (1970) utilized the Dantzig-Wolfe
decomposition algorithm to find the optimal
treatment configuration for meeting water
quality standards for the Miami River of
Ohio. Simultaneously, optimal pollution
taxes to achieve this configuration were
determined without complete knowledge of
treatment cost functions. Upton (1968)
derived a method for determining the level of
pollution taxeS that would raise revenue
sufficient to pay for the cost of the low
flow augmentation method. The effectiveness
of using economic incentives by decentralized
and centralized approaches to improve water
quality were discussed and compat'ed (Kneese
and Bower 1968, Johnson 1969). The impor-
tance of the concentration level rather than
the quantity of wastes discharged to the
environment was pointed out by Tietenberg
(1974). He proposed a zonal tax system which
utilized uniform tax rates within zones but
varies across zones.

None of the previous studies has com-
b ined policies influencing both water deple-
'tion and waste discharges. Since economic
damages to downstream users result from both
:total salinity discharge and upstream water
consumption, attempts to solve the problem by

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