Thursday, June 7, 2012

A Micro-Econometric Approach to Deriving Use and Non-Use Values of in-situ Groundwater: The Vosvozis Case Study, Greece

Abstract: The present study attempts to estimate the shadow price of unextracted groundwater in the Vozvozi aquifer. In the context of this study, we model the production function of vertically integrated agricultural firms in terms of an input-oriented distance function with multiple inputs. Duality theory is employed in order to extract information regarding the in situ shadow price of groundwater. This shadow price is of vital importance to the implementation of the EU Water Framework Directive and EU groundwater Directive, because it allows per farm estimation of the value of groundwater. It also allows the investigation of the level of cost recovery when resource's environmental and resource costs are also considered. In this context, groundwater dependent ecosystems are of great relevance. In our case study, groundwater level decline induces recharge from Vosvozis River and Ismarida Lake, diminishing thus an important source for the life of the wetland ecosystem. Another threat due to groundwater level decline is the intrusion of seawater in the wetland area, causing thus a serious alteration in the initial character of this protected ecosystem. This study offers the opportunity to reveal individual farmer's valuation of the marginal unit of groundwater in the aquifer and provide policy recommendations for water pricing that provides adequate incentives for users to use groundwater resource efficiently considering groundwater dependent ecosystems.
[The authors] calculate the estimated in situ price i.e. value for farmers (use value) per cubic meter, of unextracted groundwater in the Vosvozi aquifer as in Koundouri & Xepapadeas (2004). The mean annual per farm minimum restricted cost function CIR is approximated by the mean annual per farm revenue. The change in the restricted distance function per unit change in groundwater extraction RDFPUCGE measured in € per cubic meter is the estimated parameter of the quantity of groundwater extraction from the stochastic distance function estimation ... and Wi is the mean groundwater extraction per farm, measured in m3.

Estimated in situ price of unextracted groundwater 2010
CIR                     €4,083.61
RDFPUCGE        €0.01/m2
Wi                     16,686.33 m3

Few studies have attempted to measure the value that people place on the ecological services that ground water supplies, while few are also the studies that estimate non-use values related to quality (Hasler et al., 2005; Press and Söderqvist, 1998; Rozan et al., 1997; Jensen et al., 1995) or quantity (Koundouri et al., 2012) of groundwater. In particular, in Rozan et al., (1997) the estimated 52€ per household/year in 1995 of non-user households to protect the Alsatian aquifer (France) is considered as a proxy of its existence value and is used to assess the economic non-use value of the aquifer. Similarly, Press and Söderqvist (1998) employed Contingent Valuation (CV) method to estimate the benefits of groundwater protection in the Milan area (Italy) in order to also consider non-use values directly. The study elicited a high value of ITL 640 000 per household/year showing the broad values at stake in the preservation of groundwater. In addition, Jensen et al. (1995) by using CV method estimated the Willingness to Pay (WTP) for groundwater protection from pollution at DKK 1000 household/year elicited by an open-ended payment format, and at DKK 2100 using the close-ended format. Regarding the Choice Experiment (CE) method the applications are even less. Hasler’s et al. (2005) national CE study assessed the non-marketed benefits associated with increased protection of the groundwater resource and revealed an estimated WTP of 253 €/year for protected and naturally clean groundwater, not in the need for purification, a WTP for good conditions for flora and fauna in waterways and lakes of 161 €/year, and a WTP for purified water of 122 €/year (all in 2005 prices). Finally, in Koundouri et al., (2012) the case study of interest is Rokua in Northern Finland, a groundwater dependent ecosystem very sensitive to climate change and natural variability that faces disturbance of the water dynamics and in particular of water quantity. Results of a CE survey indicate that an average household is willing to pay €22 - €23 (one-off payment) in order to ensure that water management will not allow the decline of total quantity of water available in groundwater aquifer, lakes and spring. As a result, the above prices in contrast with the in situ derived value from Vosvozi case study reveal the important role of non-use values which are of considerable magnitude when seen from residents’ perspective.

Furthermore, ... in situ value of unextracted groundwater is much lower than the established in situ per cubic meter groundwater’s total economic value. This total economic value is equal to the relevant backstop technology for water, which is for example the per cubic cost of desalination (at €0.05, see Koundouri 2000). This divergence points to the significant non-use values of groundwater, such as option value and ecosystem resilience value, as well as alternative use values of economic sectors other than agriculture. Another point is raised after comparing our estimate of the individual farmer’s valuation of the marginal unit of groundwater in the aquifer with the socially optimal shadow price of in situ groundwater derived for the Kiti aquifer in Cyprus in 1999 by Koundouri and Christou (2000). The in situ value (in Cyprus pounds) of the resource was determined to be £0.2017 per m3 of water. As it has been also noted in Koundouri and Xepapadeas (2004) where results were similar to this study, such a divergence can be rationalized in the presence of no cooperative behavior and common pool externalities, as current users of the resource are willing to pay only the private cost and not the full social cost of their resource extraction.
The full paper is currently available free of charge at http://wpa.deos.aueb.gr/docs/Chapter_Vosvozis_draft_Koundourietal.doc
by Phoebe Koundouri 1, Babalos Vasilis 2, Marva Stithou 3 and Anastasiou Ioannis 4
1. Dept. of International and European Economic Studies, Athens University of Economics and Business
2. University of Piraeus
3. University of Stirling, UK, (
4. University of Southampton 
via Research Papers in Economics (REPEC) http://ideas.repec.org
Paper provided by Athens University of Economics and Business; Postal: 76, Patission Street, Athens 104 34; Phone: (+301) 8214021; Fax: (301) 8214021; Web page: http://deos.aueb.gr/
DEOS Working Paper Number 1212; February 1, 2012

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