Ecological Economics 151 (2018) 195–209

Contents lists available at ScienceDirect

Ecological Economics
journal homepage: www.elsevier.com/locate/ecolecon

The Effects of Source Water Quality on Drinking Water Treatment Costs: T

A Review and Synthesis of Empirical Literature
⁎
James I. Price , Matthew T. Heberling
Office of Research and Development, U.S. Environmental Protection Agency, Cincinnati, OH 45268, United States

A R T I C LE I N FO A B S T R A C T

Keywords: Watershed protection, and associated in situ water quality improvements, has received considerable attention as
Water quality a means for mitigating health risks and avoiding expenditures at drinking water treatment plants (DWTPs). This
Source water protection study reviews the literature linking source water quality to DWTP expenditures. For each study, we report
Community water systems information on the modeling approach, data structure, definition of treatment costs and water quality, and
Drinking water treatment
statistical methods. We then extract elasticities indicating the percentage change in drinking water treatment
Avoided treatment costs
Economic analysis
costs resulting from a 1% change in water quality. Forty-six elasticities are obtained for various water quality
parameters, such as turbidity, total organic carbon (TOC), nitrogen, sediment loading, and phosphorus loading.
An additional 29 elasticities are obtained for land use classification (e.g., forest, agricultural, urban), which often
proxy source water quality. Findings indicate relatively large ranges in the estimated elasticities of most para-
meters and land use classifications. However, average elasticities are smaller and ranges typically narrower for
studies that incorporated control variables consistent with economic theory in their models. We discuss the
implications of these findings for a DWTP's incentive to engage in source water protection and highlight gaps in
the literature.

1. Introduction
Drinking water treatment plant (DWTP) design and operation is
based on, among other considerations, the physical, chemical, and
microbiological characteristics of its source water. Within design limits,
DWTPs respond to water quality declines by altering treatment pro-
cesses (e.g., retention time, chemical dosing, etc.) to meet potable water
standards and performance objectives. Dramatic declines in water
quality, due to severe algal blooms or the presence of cyanobacteria,
may occasionally result in temporary plant shutdowns and drinking
water advisories (Henry, 2013; Kansas Department of Health and
Environment, 2011; Snider, 2014). When water pollution regularly
exceeds design thresholds, DWTPs may purchase new capital assets or
develop alternate source water resources (Hanson et al., 2016; Jones
et al., 2007), which, in turn, can lead to higher water rates for con-
sumers. The effect of reduced source water quality is thus a potential
decrease in consumer welfare and, notwithstanding temporary shut-
downs, an unequivocal increase in treatment costs. Estimates of these
welfare effects have been included in US Environmental Protection
Agency (EPA) assessments of surface water quality regulations
(Griffiths et al., 2012).
Source water protection (SWP), defined broadly as actions that
safeguard source water conditions from adverse impacts prior to intake,
has received growing attention as part of a multi-barrier approach to
mitigating water-related health risks and avoiding treatment costs. For
instance, the 1996 amendments to the US EPA's Safe Drinking Water
Act authorized funding for SWP programs and required states to per-
form assessments of source waters to determine their susceptibility to
contamination (Tiemann, 2014). Recent additions to California's Water
Code establish source watersheds as part of a DWTP's infrastructure;
financing for repair to source watersheds is also made available
(California Water Code §108.5, 2016). Moreover, recent literature in-
dicates that dozens of municipalities are engaged in SWP activities
(sometimes referred to as water funds or natural infrastructure), such as
land acquisition and management, compensation to landowners for
adopting best management practices, and public education campaigns
(Abell et al., 2017; Bennett et al., 2014; Carpe Diem West, 2011; Dudley
and Stolton, 2003; Gartner et al., 2013; Herbert, 2007). These practices
have, in some instances, been linked to reductions in key water quality
impairments, including turbidity, pesticides and nutrients, with the
latter subsequently linked to lower algae concentrations and a lower
probability of algal and cyanobacteria bloom events. Boston has a well-
known SWP program. Since the 1980s, the city has undertaken ex-
tensive watershed management efforts, at a cost of $135 million for

⁎
Corresponding author.
E-mail addresses: Price.James@epa.gov (J.I. Price), Heberling.Matt@epa.gov (M.T. Heberling).

https://doi.org/10.1016/j.ecolecon.2018.04.014
Received 15 November 2017; Received in revised form 22 March 2018; Accepted 10 April 2018
0921-8009/ Published by Elsevier B.V.
J.I. Price, M.T. Heberling
land acquisition alone, to avoid the cost of constructing and operating a
filtration plant (Alcott et al., 2013). As a result, the city has maintained
a waiver from filtration under the US EPA's Surface Water Treatment
Rule. Other high-profile examples of municipalities engaged in SWP
include New York, Denver, Salt Lake City, San Antonio, Santa Fe, and
Seattle (Bennett et al., 2014; Carpe Diem West, 2011). Outside the US,
SWP has been adopted by cities as diverse as Munich, Stockholm,
Sydney, Tegucigalpa, Tokyo, and Victoria (Capital Regional District,
2017; Dudley and Stolton, 2003).
The notion that SWP is more cost effective than traditional treat-
ment processes is common—but evidence from high-quality benefit-
cost analyses (BCAs) is limited (Gartner et al., 2013; Herbert, 2007).
The validity of any such analyses partially rests on having an accurate
understanding of linkages between ecosystems, hydrologic systems, and
DWTPs. This review, motivated to better understand these linkages and
to facilitate BCAs, consolidates available evidence from studies that use
cost functions, or related approaches, to quantify the relationship be-
tween measures of water quality and treatment cost. From these stu-
dies, we extract elasticities that indicate how costs respond to marginal
changes in water quality. Average elasticities are then calculated for
key water quality measures. We discuss the implications of this review
for SWP decisions and highlight notable gaps in the literature.
2. Theoretical Framework
Production theory provides an overarching framework for the
avoided treatment cost literature (Varian, 1992). Most studies we
looked at, regardless of data structure or statistical methods, relate
source water quality to treatment costs using either a cost function or
price function approach. Some studies use alternate approaches that
rely, sometimes implicitly, on the underlying cost minimization as-
sumption inherent in these functions. We address these approaches
later. Here we develop cost and price function models for a DWTP using
non-purchased source water.
Cost functions define the minimum cost needed to produce a pre-
determined output. They are well-suited for modeling DWTP behavior,
which is usually constrained by some form of revenue control (i.e., caps
on revenue, service charges, or rates-of-return) and a requirement to
meet customer demand for set water rates (Estache and Rossi, 2002;
Renzetti and Dupont, 2009). Cost functions are classified as either
short- or long-run. In the short-run, capital inputs are assumed fixed
and a DWTP minimizes costs by optimally choosing quantities of the
variable inputs. In the long-run, capital is also variable, as new treat-
ment facilities can be constructed or source waters tapped, and opti-
mization occurs in the choice of all inputs. Formally, short- and long-
run cost functions for a single-output DWTP are
csr = f (y, PX , K , Q)
clr = f (y, PX , PK , Q),
where csr represents short-run total costs, clr long-run total costs, y the
volume of potable water, PX a vector of variable input prices, PK a
vector of capital input prices, K a vector of quasi-fixed capital inputs,
and Q a vector of source water characteristics. For concreteness, Q can
be viewed as a set of physical, chemical and microbiological water
quality measures. Since these parameters affect a DWTP's choice of
treatment technology, capital stock in the short-run function can itself
be considered a function of Q (i.e., modeled as K(Q)). Statistical esti-
mation of the cost function requires a specified functional form (e.g.,
linear, Cobb-Douglas, and trans-log).
The price function is a related modeling approach. It is based, as
before, on cost minimization, but also hinges on the assumption that
water rates are set equal to a DWTP's long-run average costs (Abildtrup
et al., 2013). This latter condition is applicable to DWTPs—typically
publicly managed systems—that operate under a balanced budget
constraint. The price function for such a DWTP is
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Ecological Economics 151 (2018) 195–209
r = f (y, PX , PK , Q),
where r is the water rate and the remaining elements are defined as
before.1 Similar to the cost function, statistical estimation requires a
specified functional form.
3. Literature Search and Selection Criteria
We conducted a thorough search for studies linking treatment costs
and source water quality, which considered peer-reviewed and gray
literature from multiple disciplines, including economics, environ-
mental science, and civil engineering. Three ex ante defined criteria
were used to identify studies relevant for this review. Specifically, a
study needed to
• establish an original, quantitative functional relationship between
costs and source water quality or select proxies for water quality;
• use historic cost information obtained from community water sys-
tems (CWSs); and
• clearly describe data sources, methodological procedures, and re-
sults.2
The criteria are deliberately imprecise in several respects to ac-
commodate the broad spectrum of source water issues facing treatment
facilities, and to allow for differences in research aims and data avail-
ability. Studies meeting our criteria make use of various physical,
chemical, and microbiological water quality parameters. These para-
meters represent different spatial scales (e.g., source water body, source
watershed, etc.) and methods of measurement. Similarly, studies make
use of diverse cost measures that vary with respect to expenditure
types, timeframes, and units of measurement.
Included in the review are studies that proxy water quality with
land use classifications. Broad causal relationships between land use
and surface water quality are well established; they indicate that for-
estland, relative to agriculture and urban land, is associated with lower
concentrations of non-point source pollutants (e.g., suspended sedi-
ment, nutrients) and more desirable microbiological communities
(Baker, 2003; Dudley and Stolton, 2003). Forestland is also associated
with better groundwater quality (Lerner and Harris, 2009), which is
vulnerable to both point and nonpoint source pollution. Depending on
geological and hydrological characteristics of the aquifer, it can take
years, decades, or centuries, for surface water to infiltrate to the aquifer
wherein it becomes a component of a DWTP's source water (Lerner and
Harris, 2009). We consider, but ultimately exclude, studies that employ
precipitation and streamflow as proxy measures for water quality.
While precipitation often leads to deteriorated water quality via in-
creased runoff, its effects can be ambiguous, being dependent on the
importance of the runoff relative to a dilution effect that reduces con-
taminant concentrations (Holmes, 1988; Vincent et al., 2016). More-
over, both precipitation and streamflow measures confound issues of
water availability and water quality, which are known to have distinct
effects on treatment costs (Heberling et al., 2015; Renzetti, 2001).
We require that studies use historic cost information from CWSs.
Studies employing predicted cost data, pilot programs, or non-com-
munity systems are consequently excluded from the review. Predicted
costs are expenditures estimated for a certain type of treatment tech-
nology, or set of technologies, using engineering or statistical re-
lationships developed elsewhere. These costs, while suitable to many
applications, introduce measurement error that can bias estimated
1
Privately managed systems and public-private partnerships operate under different
constraints that give rise to an alternate price function specification equal to the sum of
marginal cost and rent paid to the operator. Marginal costs are a function of potable water
production, input prices, and source water quality (Abildtrup et al., 2013).
2
CWSs are defined, in accordance with the US Safe Drinking Water Act, public water
systems that supply potable water to at least 15 service connections used by year-round
residents or regularly serves at least 25 year-round residents (40 C.F.R. §141.2, 2016).
J.I. Price, M.T. Heberling
relationships if they are correlated with model covariates such as
output volume or source water quality. This error can be substantial,
with predictions differing from actual costs by +50 to −30%
(McGivney and Kawamura, 2008). Even when tailored to a specific
DWTP, predicted and actual costs will differ since the former are based
on historical averages that ignore site-specific differences in some plant
design features, operational practices, input prices, and customer
characteristics.
Finally, we exclude from the review several studies that are missing
vital pieces of information, or are reproduced elsewhere, but that
otherwise meet the selection criteria. Most of these studies are not
centrally concerned with avoided treatment costs. A complete list of
studies not meeting our selection criteria, and a rationale for their ex-
clusion, is available upon request.
4. The Avoided Treatment Cost Literature
An initial literature search identified several hundred potentially
relevant manuscripts, from which 24 met the aforementioned criteria.
Despite similar frameworks, these studies exhibit considerable hetero-
geneity due to differences in motivation, data availability, and mod-
eling approaches. Characteristics of the studies are reported in Table A;
they pertain, unless otherwise noted, to the preferred specification of
the model relating costs to source water quality. Where there is ambi-
guity about a characteristic, we report the most likely information
based on available evidence and note the uncertainty. An augmented
version of Table A containing additional information and a database of
elasticities that can be sorted or filtered are available in Appendix B -
Supplementary material.
4.1. Geography and Motivating Factors
A majority of the 24 selected studies are based in the US (n = 15),
with the remainder conducted in Canada, France, India, Japan,
Malaysia, and Spain. In the US, roughly 47% (n = 7) use subnational
samples (i.e., they evaluate data for a single DWTP or region). The US
studies are concentrated in the Midwest (Forster et al., 1987; Forster
and Murray, 2007; Heberling et al., 2015), but also include Oregon
(Moore and McCarl, 1987), Texas (Dearmont et al., 1998), Oklahoma
(Oklahoma Water Resources Board, 2011), and the Great Lakes Region
(Murray, 2001). By comparison, 66% of non-US studies use subnational
samples. All national level analyses pertain to high-income countries
where there is access to DWTP-related databases maintained by gov-
ernment agencies or professional associations.
The selected studies cite a diverse set of objectives and underlying
motivations. Nonpoint source pollution from agricultural runoff (e.g.,
sediment, nutrients, pesticides) is the key concern for many US studies
(n = 8), as well as for France-based Abildtrup et al. (2013) and
Fiquepron et al. (2013). For these analyses, avoided treatment costs
represent a lower-bound estimate of externalities imposed by upstream
agriculture. Another more geographically disperse set of studies (n = 7)
are principally concerned with how forest landscapes, and associated
disturbances (e.g., logging, wildfire), affect source water quality within
associated watersheds. In a recent example, Vincent et al. (2016) find a
negative correlation between forestland (relative to non-forestland) and
short-run treatment cost at Malaysian DWTPs. The correlation is sig-
nificantly larger for virgin forestland than logged forestland. These
analyses, in contrast to those motivated by nonpoint source pollution,
view avoided treatment costs to be a lower-bound estimate of eco-
system services benefits provided by forest resources. The remaining
studies cite other motivations, including evaluating water quality
standards, omitted variable bias in cost efficiency estimates, welfare
implications of source water quality changes, and endogeneity between
technology choice and ecosystem service values. Avoided treatment
costs are a secondary concern for these analyses.
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Ecological Economics 151 (2018) 195–209
4.2. Data Structure
The specifics of any analysis are largely dictated by the structure
and content of available data. Many studies rely on cross-sectional
survey data (n = 13) that may not be designed to assess avoided
treatment costs. Four studies use data obtained from American Water
Works Association member surveys (Holmes, 1988; Mosheim, 2006;
Mosheim and Ribaudo, 2017; Piper, 2003). These surveys are primarily
intended to provide CWS managers with organizational and operational
information about other treatment systems. They are not based on a
random sampling framework.
Selected studies also make use of panel (n = 6) and time-series
(n = 5) data. While these data may be obtained via surveys, they are
more likely to entail direct communication with water providers and
more targeted information gathering. An advantage of these data
structures is the potential to control for unobserved characteristics (e.g.,
treatment processes, population traits, input price variation) that when
omitted from cross-sectional analyses may bias estimated model coef-
ficients. In practice, however, less than half of the studies using panel or
time-series data employ estimation techniques that capitalize on this
benefit.
Datasets vary considerably in their number of observations. Among
cross-sectional analyses, observations range from fewer than 50 (Ernst
et al., 2004; Freeman et al., 2008; Mosheim and Ribaudo, 2017;
Oklahoma Water Resources Board, 2011; Renzetti, 2001; Warziniack
et al., 2017) to nearly 1000 (Price et al., 2017). The smallest panel
datasets contain 5 years of annual observations for fewer than 15
DWTPs (Forster and Murray, 2007; Murray, 2001). In contrast, the
largest dataset, exploited by Vincent et al. (2016), contains 15 years of
monthly observation for 41 DWTPs. Time-series datasets used by Moore
and McCarl (1987), Honey-Rosés et al. (2014), and Heberling et al.
(2015) have 247, 963, and 1826 daily observations, respectively. Singh
and Mishra (2014) use 144 monthly observations.
Studies can be further classified by their unit of analysis. Most are
conducted at the DWTP level (n = 14), and therefore relate ex-
penditures incurred at a treatment facility to measures of that facility's
influent water quality. A second group of studies are conducted at the
CWS level (n = 8), which often operate multiple DWTPs that draw from
source waters with different water quality characteristics. Similarly,
Fiquepron et al. (2013) and McDonald and Shemie (2014) use units
based on geopolitical boundaries that also contain multiple DWTPs and
source waters. Cost data in these studies typically reflect expenditures
for all DWTPs within the unit of analysis, while covariates, including
source water quality measures, are usually defined as the weighted
average across the DWTPs. Most studies evaluate DWTPs that rely on
surface water inputs (n = 18), while the remaining studies evaluate
both surface water and groundwater facilities. There are no studies that
pertain exclusively to groundwater DWTPs. Since surface water systems
are on average larger than groundwater systems, the datasets used by
selected studies consist of relatively large DWTPs (US EPA, 2009b). In
the US, where most facilities are small groundwater systems, the
average CWS produces 3700 m3/day of potable water.3 By comparison,
average production in the US based studies ranges from 3530 to
183,700 m3/day. Across all studies, the DWTPs evaluated by Abildtrup
et al. (2013) and Fiquepron et al. (2013) have the smallest production.
In Abildtrup et al. (2013) production ranges from 4 to 7640 m3/day,
with an average of 290 m3/day. The DWTPs evaluated by Horn (2011)
and Warziniack et al. (2017) exhibit the largest range in production;
both studies include facilities producing < 600 m3/day and >
1,000,000 m3/day.
3
Authors' calculation based on information provided in US EPA (2009a) and US EPA
(2009b).
J.I. Price, M.T. Heberling
4.3. Cost, Water Quality, and Control Variables
There are several differences between the cost, water quality, and
control variables used in the selected studies. These differences should
be considered when comparing results across studies as they will affect
estimated relationships between costs and water quality measures ir-
respective of differences in study sites.
Cost variables are expressed in a variety of different currencies, time
periods, and production quantities. For this review, however, the
principle difference pertains to the scope of expenditures encompassed
by the variable. In their most restricted form, costs are limited to ex-
penditures related to a single type of input. Dearmont et al. (1998),
Forster and Murray (2007), and Warziniack et al. (2017) exemplify this
approach; they establish a function relationship between expenditures
on treatment chemicals and changes in source water quality. Many
studies (n = 8) use a broader definition of costs that includes ex-
penditures for multiple inputs into the treatment process (e.g., labor,
chemicals, electricity). These costs, henceforth referred to as O&M
costs, are themselves heterogeneous, with some studies also including
expenditures related to facility maintenance, source water acquisition,
and treated water distribution. In their broadest form, costs include
expenditures on all variable and capital inputs. Horn (2011), Ernst et al.
(2004), and Renzetti (2001) define costs in this manner, where capital
expenditures are based on dedicated construction costs, depreciation,
and debt payments. Studies utilizing a price function approach
(Abildtrup et al., 2013; Fiquepron et al., 2013; Piper, 2003) fall into this
category since water rates are assumed to reflect long-run average costs.
Water quality measures can be classified as either water parameters,
watershed loading, or land use characteristics. Water parameters de-
scribe the physical, chemical, and microbiological traits of source
water, and are usually presented in terms of pollutant concentrations.
Selected studies employ a variety of parameters, namely: temperature,
pH, conductivity, turbidity, total organic carbon (TOC), nitrogen, and
calcium carbonate.4 Turbidity is the most common parameter (n = 12);
it is near universally monitored by DWTPs and used by operators to
optimize treatment processes, assess performance, and monitor com-
pliance (Crittenden et al., 2012; Pizzi, 2005). Abdul-Rahim and Mohd-
Shahwahid (2011) and Dearmont et al. (1998) emphasize the combined
effects of particulate matter and acidity/alkalinity on chemical dosage
decisions by evaluating the multiplicative interaction of turbidity and
pH. A related approach, employed by Freeman et al. (2008) and
Renzetti (2001), is to construct a water quality index (WQI) that in-
corporates multiple water quality parameters. The former index is
composed of TOC, turbidity, and alkalinity, and the latter composed of
fecal coliform, lead, aluminum, benzene, polychlorinated biphenyl, and
trichlorobenzene. In a few studies, rather than source water quality,
water quality parameters represent the difference between source water
and treatment water quality (Abdul-Rahim and Mohd-Shahwahid,
2011; Dearmont et al., 1998; Forster et al., 1987; Horn, 2011; Mosheim,
2006; Mosheim and Ribaudo, 2017; Piper, 2003). This specification,
while likely a more accurate representation of the data generating
process, is difficult to implement given that raw and treated water
quality data are rarely available in the same database.
In contrast to parameters, watershed loading measures describe the
quantity of sediment, nutrients, or pesticides entering surface water due
to runoff. We identify these variables with the qualifier load (e.g.,
4 Most studies, as previously noted, can be classified as using a cost
Turbidity is a measure of water clarity that is correlated with disease causing mi-
croorganisms. TOC is positively associated with chemical usage in water treatment and
subsequent increases in the formation of harmful disinfection byproducts (DBPs).
Nitrogen, in the form of nitrate, poses a serious health risk for infants. Turbidity, nitrate,
and several DBPs are regulated by the US EPA (2009c). Source water temperature, pH,
and calcium carbonate (i.e., calcium alkalinity) levels are not typically hazardous but can
affect chemical dosing. Conductivity is a measure of dissolved salts and inorganic ma-
terial, and is a major cost driver in desalination processes. An overview of water treat-
ment stages is available in CDC (2015).
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Ecological Economics 151 (2018) 195–209
sediment load, pesticide load). Load measures, broadly speaking, are
defined in terms of mass per unit time, and are thus equivalent to the
product of a pollutant's concentration and a volumetric flow rate.
Fiquepron et al. (2013) include a measure of the proportion of source
waters that are in guideline noncompliance, which we also categorize
as a loading measure because it concerns contamination at the wa-
tershed scale. Finally, land use characteristics describe the proportion
of land within an area (e.g., watershed, service area, geopolitical
boundary) with a certain land cover or land use designation. The most
common categories are forestland, agriculture, and urban—where wa-
tersheds with a greater proportion of forestland, or smaller proportions
of agriculture and urban land, are expected to have better water quality
and lower treatment costs. Classifications such as grassland, rangeland,
and barren land are also occasionally employed (Fiquepron et al., 2013;
Warziniack et al., 2017). Forster and Murray (2007) and Murray (2001)
disaggregate agricultural land by their predominant tillage practices:
conventional tillage with < 15% crop residue, conventional tillage with
15–30% crop residue, ridge and mulch tillage, and untilled land. Si-
milarly, Fiquepron et al. (2013) disaggregate agricultural land into low-
intensity cereal crop production and higher-intensity vine cultivation,
market gardening, and arboriculture. Vincent et al. (2016) decompose
forestland by logging practices in their analysis of Malaysian DWTPs.
Control variables (i.e., covariates other than water quality mea-
sures) are included in cost and price functions to control for factors that
may bias parameters of interest. Economic theory offers some insight in
this regard (see Section 2), but fails to provide guidance for a con-
siderable number of possible variables. Moreover, there are circum-
stances, particularly with panel and time-series analyses, where it
would be inappropriate to include variables suggested by theory. Thus,
whether a set of control variables captures the key confounding factors
depends on the particulars of the data and the modeling procedure.
Many studies incorporate control variables, exceptions being Ernst et al.
(2004), Freeman et al. (2008), Honey-Rosés et al. (2014), McDonald
and Shemie (2014), and Oklahoma Water Resources Board (2011). The
most common control variable, consistent with economic theory, is the
volume of treated water (i.e., production output). Several studies also
explicitly control for some combination of labor, chemical, and energy
prices (Holmes, 1988; Horn, 2011; Mosheim, 2006; Mosheim and
Ribaudo, 2017; Price et al., 2017; Renzetti, 2001).5 This price data may
be obtained directly from water providers, or are extracted from census
data, regional price schedules, and supplier price lists. For short-run
cost functions, fixed capital stock, when included, is modeled as treat-
ment capacity (Price et al., 2017) or as the ratio of operating profit and
the opportunity cost of capital (Mosheim, 2006; Mosheim and Ribaudo,
2017). For long-run functions, capital prices are defined as the ratio of
capital costs to fixed tangible assists (Horn, 2011) or the average in-
terest rate on debt (Renzetti, 2001). Additional control variables pertain
to weather conditions, source water type (e.g., surface water, ground-
water), systems characteristics (e.g., treatment processes, network
density, management regime), and service population characteristics
(e.g., population density, residential deliveries, non-residential de-
liveries). The latter category is relevant when the dependent variable
includes distribution costs and it is necessary to control for factors af-
fecting delivery.
4.4. Modeling Approach and Estimation
(n = 19) or price (n = 3) function approach. An alternative method,
employed by Moore and McCarl (1987) and Honey-Rosés et al. (2014),
5
Several other studies implicitly control for input prices, or capital stocks, via the use
of spatially concentrated cross-sectional data with little variation across observations,
time-series data with time-invariant prices and capital stock, or panel fixed-effects tech-
niques.
J.I. Price, M.T. Heberling
is to model factor inputs (e.g., alum usage, energy usage), which are
then multiplied ex post by input prices to determine cost. Within each of
these functional approaches there exist a number of possible model
specifications and estimators. Several studies employ univariate models
(n = 17), whereby a single equation, or multiple independent equa-
tions, relate treatment costs to water quality measures.6 Remaining
studies develop multivariate models that relate costs to water quality
measures using a system of equations. For example, treatment costs
may be modeled as a function of turbidity (i.e., a cost function) and
turbidity modeled as a function of land use characteristics (i.e., a tur-
bidity model). Once model parameters are estimated, the recursive
relationship between the two equations can be exploited to estimate the
effect of changes in land use on treatment costs. The advantage of this
approach is that the cost function contains only those predictors that
directly affect the DWTP operations, while still allowing auxiliary land
use, or watershed loading measures, to affect costs indirectly. Such
models are used with regards to pesticide exceedance (Fiquepron et al.,
2013), phosphorus load (Heberling et al., 2015), sediment load
(Holmes, 1988), and land use classifications (Forster and Murray, 2007;
Murray, 2001; Singh and Mishra, 2014; Warziniack et al., 2017). A
smaller set of studies use multivariate models to other ends. Piper
(2003) jointly estimates a price function and a water demand function
to evaluate how changes in source water quality affect consumer wel-
fare. Both Mosheim (2006) and Renzetti (2001) jointly estimate a cost
function and input share equations using seemingly unrelated regres-
sion (SUR).
For statistical estimation of a model, it is necessary to specify a
functional form. It is possible, although not always practiced, to test
multiple specifications to determine the form that best represents the
data generating process. We classify studies based on the specified re-
lationship between cost and water quality measures. The log-linear
specification is used the most frequently because of its ability to capture
nonlinearity and ease of interpretation (n = 14), followed by linear,
polynomial, trans-log, and semi-log specifications. The trans-log speci-
fication, used only by Mosheim (2006) and Renzetti (2001), is highly
flexible; it allows for nonlinearities and complex interactions among
covariates.
OLS is the most frequently used estimator among selected studies
(n = 11). For many datasets, however, the underlying assumptions of
OLS are violated and alternate estimators are more appropriate.
Dearmont et al. (1998) and Moore and McCarl (1987) use estimators to
address biased variances, and subsequent issues with inference, asso-
ciated with heteroskedasticity and autocorrelation. Similarly, Abildtrup
et al. (2013) and Fiquepron et al. (2013) address endogeneity, as well as
heteroskedasticity, concerns in their respective price functions using a
three-stage estimator based on instrumental variable and generalized
methods of moments. The former study also employs a spatial auto-
correlation (SAC) framework, where treatment costs are a function of
forestland within a CWS's neighboring service areas, in addition to the
immediate area, via a spatial-lag component. Heberling et al. (2015)
consider O&M costs using an error correction model (ECM). The model,
evaluated with a maximum likelihood estimator (MLE), finds that
changes in water quality have both short-term and long-term effects on
treatment costs.7 The MLE is also used by Horn (2011), Mosheim and
Ribaudo (2017), and Price et al. (2017) to estimate stochastic cost
frontier (SCF) models, which relax the cost minimization assumption by
allowing for cost inefficiencies in the production process. Horn (2011)
finds that inclusion of source water quality in the cost function
6
We consider a model to be univariate if it has a single response variable—regardless
of the number of independent variables. A multivariate model is a system of equations
with multiple response variables.
7 9
In the context of an ECM, short-term and long-term delineate immediate single-period
relationship from cumulative multiple-period relationships. They are unrelated to the
short- and long-run labels used to describe cost functions, which demarcate the variability
of capital inputs.
199
Ecological Economics 151 (2018) 195–209
significantly affects efficiency estimates for Japanese water providers.
Price et al. (2017) find no evidence of this effect for Canadian DWTPs.
Vincent et al. (2016) uses panel fixed-effects estimator to account for
unobserved heterogeneity between DWTPs. Finally, Piper (2003) em-
ploys three stage least squares (3SLS), and Mosheim (2006) and
Renzetti (2001) iterative least square (ILS), to jointly estimate their
respective systems of equations.
5. Water Quality Elasticities of Cost
From each selected study, we extract water-quality elasticities of
cost, which are defined as the percentage change in costs resulting from
a 1% change in source water quality. The principal advantage of elas-
ticities is that they are unit-less, and thus allow for the comparison of
results across studies using diverse data structures, variable definitions,
and statistical methodologies.8 The elasticities employed here are more
precisely defined as point elasticities evaluated at a study's average
DWTP. The basic formula is η = (∂c / ∂q)(q / c ) , where c is the cost
measure, q is the source water quality measure, and an overbar denotes
the variable mean. Specific formulae depend on several factors, in-
cluding the specified functional relationship (e.g., linear, log-linear,
polynomial, etc.), presence of temporal or spatial lags, whether water
quality measures reflect source water conditions or the difference be-
tween source and treated water, and whether water quality affects costs
directly or indirectly via a linking equation in a multivariate analysis.
We make the required calculation for each water quality measure,
summing, differencing, and multiplying coefficients as appropriate.
Whenever possible we also calculate an elasticity's standard error.
These calculations are made using the restrictive assumption of in-
dependence between coefficients, which, while clearly erroneous in
many cases, is necessary given that covariance matrixes are rarely re-
ported.9 Descriptions of the calculations used for each study are avail-
able in Appendix B.
Elasticities, and corresponding standard errors, from US and non-US
studies are presented in Tables 1 and 2, respectively. We test for sta-
tistical significance of the elasticities at p-value < 0.1 using one- and
two-tailed t-test. One-tailed tests are applied to water quality para-
meters, watershed loading variables, and forestland, since the direction
of their effect on treatment costs is unambiguous. Two-tailed tests are
applied to other land use classifications. Turbidity elasticities are sta-
tistically significant in nearly all instances, ranging from an unexpected
−0.11 (Murray, 2001) to 0.30 (Forster and Murray, 2007). The latter
estimate suggests that a 1% decrease in turbidity leads to a 0.3% re-
duction in chemical treatment costs at sample averages. In the
Heberling et al. (2015) ECM, a 1% decrease in turbidity has an im-
mediate effect of 0.02%, and a long-term effect of 0.11% on O&M costs.
Price et al. (2017) find a similar elasticity of 0.10 on O&M costs, but in a
reparameterization of their main model also find that DWTPs using
conventional, direct or in-line filtration, and membrane technologies
are roughly twice as responsive to changes in turbidity as those using
only disinfection technologies. However, these differences are statisti-
cally insignificant. Moore and McCarl (1987) relate turbidity to two
different cost measures: 1) alum expenditures and 2) alum and lime
expenditures. Similarly, Singh and Mishra (2014) relate turbidity to 1)
chemical expenditures and 2) O&M expenditures. In both studies, tur-
bidity elasticities are slightly, albeit insignificantly, smaller under the
broader definition of costs. Sediment load elasticities, which like
8
Caution should be taken when making these comparisons as differences in data and
statistical methods may produce systematically different elasticities. Economic theory
suggests that elasticity will vary with the scope of expenditures included in the cost
measure, volume of production, and level of source water quality measures.
If neither standard errors nor t-statistics are reported for a study's estimated coeffi-
cients, we calculate, if possible, standard errors corresponding to the reported sig-
nificance threshold (i.e., a coefficient with a p-value < 0.05 is assumed to have a t-
statistic of 1.96).
J.I. Price, M.T. Heberling Ecological Economics 151 (2018) 195–209

Table 1
Elasticities from U.S. studies.
Reference Water quality measure Elasticity Reference Water quality measure Elasticity

⁎
Dearmont et al. (1998) Turbidity 0.27 (0.12) McDonald and Shemie (2014) Sediment load 0.26
pH 0.27 (0.12)⁎ Phosphorus load 0.19
Ernst et al. (2004) L: Non-forest Ref Moore and McCarl (1987) Turbidity (alum) 0.22 (0.02)⁎
L: Forest −0.83 Temperature (alum) −0.39 (0.12)⁎
Turbidity (alum & lime) 0.21
Forster et al. (1987) Turbidity 0.12 (0.04)⁎ Mosheim (2006) Turbidity 0.09 (0.03)⁎
Sediment load 0.41 (0.02)⁎
Forster and Murray (2007) Turbidity 0.30 (0.08)⁎ Mosheim and Ribaudo (2017) Nitrogen 0.06 (0.02)⁎
Pesticide load 0.27 (0.20)⁎ Murray (2001) Turbidity −0.11 (0.12)
L: Ridge/mulch tilleda Ref Pesticide load −0.43 (0.37)
L: Tilled w/ < 15% residuala 0.40 (0.24)⁎ L: Ridge/mulch tilleda Ref
L: Tilled w/ 15–30% residuala 0.03 (0.03) L: Tilled w/ < 15% residuala 0.10 (0.13)
L: Untilleda 0.02 (0.10) L: Tilled w/ 15–30% residuala 0.11 (0.13)
L: Non-agriculturea 0.60 (0.28)⁎ L: Untilleda −0.04 (0.12)
L: Non-agriculturea 0.12 (0.15)
Freeman et al. (2008)b TOC 0.77 (0.23)⁎ Oklahoma Water Resources Board (2011) TOC 0.55
WQI −0.53 (0.23)⁎ Piper (2003) Calcium carbonatec 0.003 (0.001)⁎
L: Forest −0.38 (0.23)⁎
L: Urban 0.22 (0.10)⁎
L: Non-forest vegetation −0.15 (0.07)⁎
Heberling et al. (2015) Turbidity (short term) 0.02 (0.01)⁎ Warziniack et al. (2017) Turbidity 0.19 (0.11)⁎
pH (short term) −0.04 (0.06) TOC 0.46 (0.19)⁎
TOC (short term) −0.04 (0.03) L: Non-forest/non-urbana Ref
Turbidity (long term) 0.11 (0.04)⁎ L: Forest (via turbidity)a −0.32 (0.22)⁎
pH (long term) −0.01 (0.06) L: Urban (via turbidity)a 0.08 (0.08)
TOC (long term) 0.10 (0.29) L: Forest (via TOC)a −0.06 (0.07)
Phosphorus load (long term)a 0.02 (0.01)⁎ L: Urban (via TOC)a 0.34 (0.56)
Holmes (1988) Turbidity 0.07 (0.02)⁎
Sediment loada 0.05 (0.02)⁎

Notes. Water quality measure: L = land use variable; TOC = total organic carbon; WQI = water quality index. Elasticity: Ref = reference land use category.
⁎
Statistically significant at p < 0.1. One-tailed test used for water quality parameters, watershed loading variables, and forestland. Two-tailed tests used for all
non-forestland classifications.
a
Elasticity estimated via a multiple-equation recursive relationship.
b
Study estimates multiple single-predictor regression models; thus, reference land use is all classifications other than the one included in the model.
c
Variable is defined as the difference between source and treated water quality. Reported elasticity does not adjust for treated water quality and underestimates
the effect of source water quality changes on treatment costs.

Table 2
Elasticities from non-U.S. studies.
Reference Water quality measure Elasticity Reference Water quality measure Elasticity

⁎
Abdul-Rahim and Mohd-Shahwahid (2011) Turbidity 0.07 (0.03) Horn (2011) TOC 0.06 (0.02)⁎
pH 0.07 (0.03)⁎
Abildtrup et al. (2013) L: Agriculture Ref Price et al. (2017) Turbidity 0.10 (0.02)⁎
L: Forest (service area) −0.48 (0.15)⁎ Turbidity (conventional) 0.12 (0.03)⁎
L: Urban (service area) 0.004 (0.03) Turbidity (filtration) 0.13 (0.05)⁎
L: Other (service area) −0.21 (0.08)⁎ Turbidity (disinfection) 0.06 (0.04)⁎
L: Forest (entire region) −0.77 (0.26)⁎ Turbidity (membrane) 0.14 (0.07)⁎
L: Urban (entire region) 0.38 (0.22)⁎ Turbidity (other) 0.08 (0.07)
L: Other (entire region) −0.49 (0.36) Turbidity (untreated) 0.06 (0.08)
Fiquepron et al. (2013) Nitrate 0.05 (0.01)⁎ Renzetti (2001) WQI 0.80 (0.22)⁎
Pesticide exceedancea 0.02 (0.01)⁎ Singh and Mishra (2014) Turbidity (chemical) 0.20 (0.08)⁎
L: Urban/agriculture Ref Turbidity (O&M) 0.19 (0.07)⁎
L: Forest −0.07 (0.03)⁎ L: Non-foresta Ref
L: Grassland 0.02 (0.02) L: Forest (chemical)a −1.71 (0.87)⁎
L: VIARMA 0.02 (0.01) L: Forest (O&M)a −1.58 (0.80)⁎
Honey-Rosés et al. (2014) Conductivity 0.86 Vincent et al. (2016) L: Non-forest Ref
L: Virgin forest −0.47 (0.19)⁎
L: Logged forest −0.32 (0.14)⁎

Notes. Water quality measure: L = land use variable; O&M = operation and maintenance; TOC = total organic carbon; VIARMA = vine cultivation, arboriculture,
and market gardening; WQI = water quality index. Elasticity: Ref = reference land use category.
⁎
Statistically significant at p < 0.1. One-tailed test used for water quality parameters, watershed loading variables, and forestland. Two-tailed tests used for all
non-forestland classifications.
a
Elasticity estimated via a multiple-equation recursive relationship.

200
J.I. Price, M.T. Heberling
turbidity reflect responses to changes in particulate matter, are also
significant in all instances, ranging from 0.05 (Holmes, 1988) to 0.41
(Forster et al., 1987).
The TOC elasticities obtained from Freeman et al. (2008), Horn
(2011), and Warziniack et al. (2017) are statistically significant, al-
though they range widely from 0.06 to 0.77. In contrast, Heberling
et al. (2015) find no significant short- or long-term relationship be-
tween TOC and O&M costs. Four elasticities relate to nutrient levels
(i.e., nitrogen, nitrate, and phosphorus load), which have been linked to
higher algae concentrations, and, when inadequately treated, adverse
health outcomes. These elasticities, with the exception of McDonald
and Shemie (2014), are statistically significant and fall within the re-
latively narrow range of 0.02 and 0.06. McDonald and Shemie (2014)
find a considerably larger elasticity of 0.19, but insufficient information
is provided to test for its significance. Vastly different elasticities,
−0.43 and 0.26, are obtained from Forster and Murray (2007) and
Murray (2001) for pesticide load. Fiquepron et al. (2013) find an
elasticity of 0.02 for pesticide exceedance, indicating that a 1% increase
in incidence of pesticide non-compliance is associated with a 0.02%
increase in long-run average costs. Finally, Piper (2003) finds an elas-
ticity of 0.003 for calcium carbonate and Honey-Rosés et al. (2014), the
only study to evaluate desalinization, find an elasticity of 0.86 for
conductivity.
Land use elasticities must be interpreted relative to a reference ca-
tegory, denoted by Ref in Tables 1 and 2. Estimated forest elasticities
are universally negative, implying that forestland leads to improved
source water quality relative to all other land use classifications. Ernst
et al. (2004) model the relationship between treatment costs and for-
estland using non-forestland as the reference category. They find a
forest elasticity of −0.83. This indicates that a 1% increase in forest-
land within a source watershed—corresponding to an equivalent de-
crease in non-forestland—will, on average, reduce costs by 0.83%.
Freeman et al. (2008), Singh and Mishra (2014), and Vincent et al.
(2016) also use non-forestland as a reference category. Singh and
Mishra (2014) find considerably larger elasticities, in absolute terms,
than those found elsewhere, with a 1% increase in forestland leading to
a 1.71% reduction in chemical expenditures and a 1.51% reduction in O
&M expenditures. Vincent et al. (2016) distinguish between virgin and
logged forestland, finding that a 1% increase in virgin forest reduces O&
M costs by 0.47% while an increase in logged forest reduces costs by
0.32%. Results from the Abildtrup et al. (2013) SAC model, where
agriculture land serves as the reference category, indicate a forest
elasticity of −0.48 for land use changes in the immediate service area
and −0.77 when changes in neighboring service areas are in-
corporated. Lastly, Fiquepron et al. (2013) find a forest elasticity of
−0.07 using low-intensity agriculture and urban land as the reference
category.
Results for other land use classifications are more ambiguous.
Estimated elasticities for urban land are mostly positive, being statis-
tically significant relative to non-urban land in Freeman et al. (2008)
and agriculture land in Abildtrup et al. (2013) when changes in
neighboring service areas are incorporated. In Warziniack et al. (2017),
where land use affects chemical costs indirectly as predictors of tur-
bidity and TOC, the elasticity for urban land is significant with regards
to turbidity but insignificant for TOC. Forster and Murray (2007) de-
compose agricultural land in Ohio watersheds by tillage practices,
finding that traditionally tilled land, as well as non-agriculture land, has
a positive and significant elasticity relative to conservation tillage.
However, a similar analysis of tillage practices in the Great Lakes Re-
gion does not support these findings (Murray, 2001). Elasticities for
other land use classifications (i.e., grassland, rangeland, vine cultiva-
tion) are largely insignificant.
We summarize the findings presented in Tables 1 and 2 by calcu-
lating mean elasticities for water quality measures most pertinent to
SWP. All elasticities are weighted equally and assumed independent for
these calculations, and no attempt is made to group elasticities by
201
Ecological Economics 151 (2018) 195–209
DWTP characteristics, modeling approach, or scope of the cost measure.
We limit each calculation (i.e., the mean elasticity for each water
quality measure) to a single elasticity per study to prevent values from
being dominated by analyses with multiple elasticities for the same
water quality measure.10 Three sets of mean elasticities are presented in
Table 3. Since these elasticities are calculated from a small, sometimes
highly variable, set of observations, values are unlikely representative
of all DWTPs. The first set (column 4) is calculated using all relevant
elasticities from the selected studies, including those without standard
errors. The second set (column 6) is calculated using all relevant elas-
ticities with standard errors, thus allowing standard errors to be cal-
culated for the mean elasticity estimates. Results from this set show a
mean turbidity elasticity, based on 12 observations, of 0.14 (CI: 0.10,
0.18).11 This estimate varies little between US and non-US studies, and
has a relatively small standard error compared to other water quality
parameters. The mean nitrogen/nitrate elasticity, based on 2 observa-
tions, is 0.06 (CI: 0.04, 0.08), and, as with turbidity, varies little be-
tween US and non-US studies. In contrast, the mean TOC elasticity is
eight times larger among US studies than non-US studies. The mean
sediment load, phosphorus load, and pesticide load elasticities, which
are based exclusively on US studies, are 0.23 (CI: 0.21, 0.25), 0.02 (CI:
0.00, 0.04), and − 0.08 (CI: -0.49, 0.33), respectively. The negative
value for pesticide load counters expectations but is insignificant.
Mean land use elasticities must be interpreted relative to the re-
ference category indicated in parentheses. First, we estimate, based on
5 observations, a mean forest elasticity of −0.67 (CI: −1.10, −0.24)
for studies using non-forestland as the reference. This elasticity is
slightly smaller among US than non-US studies. Next, we estimate a
mean forest elasticity for studies using any combination of non-forest-
land, agriculture land, or urban land as the reference. The resulting
forest elasticity of −0.58 (CI: −0.87, −0.29) is smaller than the pre-
vious estimate but remains statistically significant.
The third set of mean elasticities (column 8) is calculated using only
studies that mitigate potential omitted variable bias by 1) incorporating
control variables consistent with economic theory in their models, or 2)
using a panel fixed-effects estimator when panel data is employed. The
identification of these studies is necessarily subjective as some control
variables, namely input prices, can be implicitly controlled for when
there is little variation in these variables across observations (i.e., ob-
servations are spatially or temporally concentrated), or through spatial,
temporal, or panel fixed effects. We therefore elect to exclude studies
that clearly do not account for key confounding factors. Mean elasti-
cities for these studies are generally smaller, and in some instances also
have narrower confidence intervals, than previous estimates. The most
notable differences are for TOC and sediment load, which now have
elasticities of 0.08 (CI: -0.49, 0.65) and 0.05 (CI: 0.01, 0.09), respec-
tively — the former being highly insignificant. The mean turbidity
elasticity is slightly smaller at 0.12 (CI: 0.10, 0.14), while the nitrogen/
nitrate elasticity, now based on a single observation, is 0.06 (CI: 0.02,
0.10). The forest elasticity for studies using non-forestland as the re-
ferences category, also based on a single observation, is −0.39 (CI:
-0.63, −0.15). There is little change in the forest elasticity from studies
using any combination of non-forestland, agriculture land, or urban
land as the reference.
10
Seven studies have multiple elasticities for the same water quality measure. For the
mean elasticity calculations, we use the spatial-lag model from Abildtrup et al. (2013),
long-term values from Heberling et al. (2015), the alum model from Moore and McCarl
(1987), the main model from Price et al. (2017), the O&M model from Singh and Mishra
(2014), and turbidity values from Warziniack et al. (2017). We use a land-area weighted
average of the virgin and logged forestland elasticities obtained from Vincent et al.
(2016).
11
Values in parentheses refer to 95% confidence intervals (CI).
J.I. Price, M.T. Heberling
Table 3
Average elasticities for select water quality measures.
Water quality measure Classification All elasticities
Number of estimates Mean
Turbidity US 9 0.14
Non-US 3 0.12
Total 12 0.14
TOC US 4 0.47
Non-US 1 0.06
Total 5 0.39
Nitrogen/Nitrate US 1 0.06
Non-US 1 0.05
Total 2 0.06
Sediment load US 3 0.24
Non-US 0 0
Total 3 0.24
Phosphorus load US 2 0.10
Non-US 0 0
Total 2 0.10
Pesticide load US 2 −0.08
Non-US 0 0
Total 2 −0.08
Forest (non-forest) US 3 −0.51
Non-US 2 −0.98
Total 5 −0.70
Forest (non-forest, agriculture, urban) US 3 −0.51
Non-US 4 −0.70
Total 7 −0.62
Note. Reference land use categories are reported in parentheses following the category of interest. Standard errors are reported in parentheses following average
elasticities. Mean elasticities are calculated from a small, sometime highly variable, set of observations; thus, caution should be taken when applying these values to
other contexts.
Statistically significance for one-tailed test: *p < 0.1.
6. Discussion and Conclusion
Water-related ecosystem services are regularly subject to pressure
from anthropogenic activities and changing climate conditions. SWP
has emerged as a framework for protecting these services; it is widely
viewed as an essential and cost-effective component of a multi-barrier
approach to providing safe drinking water (Ernst et al., 2004; Gartner
et al., 2014; McDonald and Shemie, 2014). Indeed, several regulatory
agencies have adopted regulations or guidelines concerning the pro-
tection of source watersheds, including in the US EPA's Safe Drinking
Water Act. Numerous municipalities are engaged in SWP activities for
the expressed purpose of reducing O&M expenditures and averting, or
at least delaying, the purchase of costly capital assets at DWTPs
(Bennett et al., 2014; Carpe Diem West, 2011; Dudley and Stolton,
2003; Herbert, 2007). For many municipalities, however, SWP policy
decisions are made without adequate quantitative information about
the impact land management practices have on source water condi-
tions, or the subsequent link between source water conditions and
treatment costs (Dudley and Stolton, 2003; Gartner et al., 2013; Ryan,
2000). An improved understanding of these relationships is therefore
essential to striking the best possible balance between protecting in situ
water quality and purifying water via engineered treatment processes,
and for improving the design of SWP programs.
We review the literature establishing a functional relationship be-
tween treatment costs and source water quality, and, from select stu-
dies, extract elasticities reflecting the responsiveness of DWTP ex-
penditures to changes in water quality. Overall, results suggest that
marginal changes in water quality measures lead to statistically sig-
nificant but modest gains in avoided treatment costs. Estimated tur-
bidity elasticities are the most robust; they are markedly consistent
given the diversity of data and analytical methods utilized. Elasticities
are more varied for other water quality measures, including TOC,
phosphorus load, sediment load, and forestland—the latter variation
possibly due to heterogeneity in forest types (e.g., temperate, tropical),
topography, and management regimes. We also calculate mean
Ecological Economics 151 (2018) 195–209
Elasticities w/ SE Elasticities w/ SE from studies using key controls
Number of estimates Mean (SE) Number of estimates Mean (SE)
9 0.14 (0.03)* 4 0.12 (0.01)*
3 0.12 (0.03)* 1 0.10 (0.02)*
12 0.14 (0.02)* 5 0.12 (0.01)*
3 0.44 (0.14)* 1 0.10 (0.29)
1 0.06 (0.02)* 1 0.06 (0.02)*
4 0.35 (0.10)* 2 0.08 (0.29)
1 0.06 (0.02)* 1 0.06 (0.02)*
1 0.05 (0.01)* 0
2 0.06 (0.01)* 1 0.06 (0.02)*
2 0.23 (0.01)* 1 0.05 (0.02)*
0
2 0.23 (0.01)* 1 0.05 (0.02)*
1 0.02 (0.01)* 1 0.02 (0.01)*
0
1 0.02 (0.01)* 1 0.02 (0.01)*
2 −0.08 (0.21) 0
0
2 −0.08 (0.21) 0
2 −0.35 (0.16)* 0
2 −0.98 (0.41)* 1 −0.39 (0.12)*
4 −0.67 (0.22)* 1 −0.39 (0.12)*
2 −0.35 (0.16)* 0
4 −0.70 (0.21)* 2 −0.58 (0.10)*
6 −0.58 (0.15)* 2 −0.58 (0.10)*
elasticities for select water quality measures. These estimates, reported
in Table 3, provide a useful summary of existing evidence but should be
regarded cautiously given the small number of available observations.
To provide some context to the estimated elasticities, we calculate
avoided treatment costs for representative DWTPs from Abildtrup et al.
(2013), Forster and Murray (2007), Mosheim (2006), Price et al.
(2017), Vincent et al. (2016), and Warziniack et al. (2017). For these
DWTPs, the estimated benefit from a 1% reduction in source water
turbidity ranges from $121 to $13,060 (2015 USD) annually. The cor-
responding benefit from a 1% increase in forestland in the source wa-
tershed ranges between $201 and $63,293 annually. Whether these
benefits justify the cost of SWP activities is highly contextual, de-
pending on site-specific ecologic, hydrologic, and DWTP characteristics.
However, some broad insight can be gleaned with regard to forestland
impacts on representative DWTPs from Abildtrup et al. (2013), Forster
and Murray (2007), Vincent et al. (2016), and Warziniack et al. (2017).
In these studies, a 1% increase in forestland corresponds to the con-
version of between 955 and 22,680 ha in the average watershed or
service area. Costs of forestland conversion and protection vary widely
but are usually at least several hundred dollars per hectare (McDonald
and Shemie, 2014), implying that SWP costs greatly exceed benefits for
these representative DWTPs. Generally speaking, Heberling et al.
(2015) and Vincent et al. (2016) reach similar conclusions in their re-
spective analyses. Pyke et al. (2002) find that costs typically exceed
benefits for SWP programs using riparian buffers to mitigate agri-
cultural runoff, but that benefits exceed costs for programs using con-
servation tillage practices. McDonald and Shemie (2014) conclude that
SWP is a cost-effective option for 28% of major world cities. Their
analysis identifies the least cost approach to SWP using a mix of spa-
tially targeted interventions (e.g., reforestation, riparian restoration,
payment to landowner for adopting best management practices), but
also relies on a relatively large water quality elasticity of 0.5 to de-
termine benefits. Regardless, evidence suggests that SWP will not be
cost effective in most situations where estimated benefits are limited to
avoided water treatment expenditures. Accounting for additional
202
J.I. Price, M.T. Heberling
treatment costs (e.g., reservoir dredging and sludge disposal), health
impacts, reduced risk of contamination, secondary beneficiaries (e.g.,
recreationists and homeowners), and potential income streams from
managed lands (e.g., logging) may yield different results. In addition,
Adhikari et al. (2016) find evidence of household willingness-to-pay for
restoration of a source watershed located far from the municipality it
supplies. This suggests households may value SWP beyond the benefits
from avoided treatments costs and independent of improved recrea-
tional experiences, reduced wildfire risk to homes, or aesthetics.
Findings from this review expose several key knowledge gaps.
Foremost among these gaps is the relationship between source water
quality and long-run treatment costs. The choice of technology at a DWTP
is partially determined by source water conditions. McDonald et al. (2016)
offer evidence to this effect, finding a negative relationship between
source water quality and the probability of using more advanced treat-
ment technologies. Further evidence is found in the numerous accounts of
DWTPs augmenting their water treatment infrastructure in response to
worsening water conditions. For example, Dunlap et al. (2015) report that
Waco, Texas spent $65 million to construct a dissolved air flotation plant
in order to mitigate taste and odor problems resulting from frequent algal
bloom events. Similarly, Des Moines, Iowa built a nitrate removal facility
to address periodic spikes in source water nitrate; and Wichita, Kansas and
Celina, Ohio addressed algae-related concerns with the addition of pre-
ozonation and granular activated carbon processes to their treatment
systems, respectively (Davenport and Drake, 2011; Jones et al., 2007;
Oneby and Bollyky, 2006). What is unknown, however, is the extent that
source water quality, or uncertainty about future water quality, affects
long-run costs after controlling for confounding factors such as the price of
capital inputs. While some of these issues are evaluated in Horn (2011),
Renzetti (2001), Abildtrup et al. (2013), Fiquepron et al. (2013), and Piper
(2003), no definite conclusions can be made regarding the effects of water
quality on long-run costs relative to short-run costs. In addition, reservoir
dredging, sludge disposal, and in situ treatment (e.g., algaecide) are peri-
odic but costly activities that have been ignored in cost function analyses
(Babatunde and Zhao, 2007; Buckley et al., 2014). As with capital ex-
penditures, exclusion of these expenditures leads to an underestimation of
the effect of source water quality on treatment related costs.
Another knowledge gap concerns the dearth of studies evaluating most
water quality measures. Apart from turbidity, where the effect on variable
treatment costs appears reasonably well understood, there is an in-
sufficient elasticity of cost estimates from studies that control for con-
founding factors. Additional research is needed on widespread water
quality issues, including TOC, nitrogen and nitrate, phosphorus, algae, and
harmful algal and cyanobacteria blooms. Given the heterogeneity of
source water conditions, some DWTPs will be affected by less common
chemical and biological contaminants (e.g., sodium, perchlorate, trace
metals). Evaluation of these parameters is warranted when their effect on
treatment costs can be distinguished from that of other water quality
measures and when SWP activities can be used to reduce contamination.
Continued research on land use is also needed, particularly with
regards to differentiating the effects of various agricultural, forestland,
and storm water management practices. For example, similar to Vincent
et al. (2016), there is potential to evaluate the relative effects of low-,
medium-, and high-intensity forest management approaches on treat-
ment costs. While equilibrium relationships are of primary interest, re-
search on the dynamics between changes in these management practices
and treatment costs would also prove beneficial. Related knowledge gaps
concern nonlinearities in water quality measures and interactive effects
of multiple water quality measures. Results from studies using trans-log
and third-order polynomial specifications indicate the presence of
complex nonlinearities between treatment costs and water quality
203
Ecological Economics 151 (2018) 195–209
measures not captured in most studies. Likewise, results from studies
using interaction terms between water quality measures (e.g., Abdul-
Rahim and Mohd-Shahwahid, 2011; Dearmont et al., 1998) or WQIs
(e.g., Freeman et al., 2008; Renzetti, 2001) suggest there are interactive
effects not captured by most studies. Further exploration of these issues
would aid BCAs that involve non-marginal changes in source water
quality or changes in multiple quality measures.
Water quality elasticities of costs may vary across output levels,
treatment technologies, source water types, seasons, and geographic re-
gions. Of selected studies, only Mosheim (2006), Mosheim and Ribaudo
(2017), and Price et al. (2017) investigate this type of heterogeneity. A
particularly notable gap in the literature concerns small-scale groundwater
systems, which comprise the vast majority of treatment systems but have
not been evaluated separate from surface water systems.
A final knowledge gap concerns the presence of thresholds in water
treatment processes. Cost function analyses usually assume smooth
functional relationships between costs and source water quality mea-
sures. But these relationships often contain discontinuities related to
predefined thresholds in the treatment processes. Beyond a defined
threshold, for example, reduced source water quality can trigger utili-
zation of chemical additives (Heberling et al., 2015; Sohn et al., 2008),
inactive capital (Honey-Rosés et al., 2013; Jones et al., 2007), and al-
ternate source waters (Towler et al., 2010). In the long-run, as discussed
above, it can also trigger the construction of new capital resources.
Incorporating thresholds into cost function analyses will be complicated
since relevant threshold values will differ by location and are often
known only to plant operators; nonetheless, it may ultimately prove a
better representation of treatment technology in many situations.
Filling these knowledge gaps will require a multi-pronged approach.
Some issues are better suited to cross-sectional or panel data that ex-
hibit considerable variation in treatment technologies, source water,
and service population characteristics. Other issues will be better as-
sessed with detailed time-series analysis that can account for certain
context-specific aspects of water treatment, such as atypical water
quality measures and threshold effects. Likewise, some approaches will
be better suited to decision making at national or regional levels and
others to a DWTP level. As additional studies become available, meta-
regression may help to address some knowledge gaps.
The main obstacle to conducting any analysis is data availability.
There exist only a few datasets containing the information required to
quantify links between treatment costs and water quality—and many
are small non-random samples. Engineering equations offer an alternate
approach to assessing these links, but no study to our knowledge has
compared behavioral and engineering cost models to determine the
validity of this approach. Thus, there is need for both the targeted
collection of new data and for the comparison of behavioral and en-
gineering cost models. Doing so will be vital to continued research on
avoided treatment costs and benefits of SWP activities.
Declaration of Interest
None.
Acknowledgment/Disclaimer
The views expressed in this article are those of the authors and do
not necessarily represent those of the U.S. Environmental Protection
Agency. No official agency endorsement should be inferred. We are
grateful for helpful comments and feedback from Michael Elovitz,
Katherine Foreman, Kara Goodwin, Erik Helm, Hannah Holsinger, Hale
Thurston, Will Wheeler, Bo Williams, and four anonymous reviewers.
 Appendix A

Table A
Characteristics of selected studies (abbreviations defined in table notes).
J.I. Price, M.T. Heberling

Reference Data characteristics Data structure Analysis approach Dependent variable Water quality measure Control variables
1. Country 1. Unit of obs. 1. Model type
2. Source type 2. Data type 2. Estimator
3. Output (Y) in 3. # obs.a 3. Specification
1000 m3/day

Abdul-Rahim and Mohd- 1. Malaysia 1. DWTP 1. Cost function Chemical costs (MYR/m3/day): Turbidityc × pH Treated water
Shahwahid (2011) 2. SW 2. PNL 2. Panel est.b Average daily chemical costs per m3 Rainy season (dv)
3. n = 144 3. Log-linear of output over two-week period.b FE-DWTP
(i = 6, t = 24)
Abildtrup et al. (2013) 1. France 1. CWSb 1. Price function Consumer price (EUR/m3): Land use (%): Treated water
2. SW & GW 2. CRS 2. SAC, IV-GMM Average price (publicly managed Forest Population
3. Av: 0.29 3. n = 232 3. Linear systems) or marginal price (privately Agriculture (ref) Population density
Mn: 0.004 managed systems) per m3 of Urban # municipalities
Mx: 7.64 residential-use water. Average price Other # intakes
is based on consumption of 120 m3/ Private system (dv)
year. Taxes, abstraction fees, and
pollution fees are excluded.

204
Dearmont et al. (1998) 1. USA 1. DWTP 1. Cost function Chemical costs (USD/100 MGL/ Turbidityc × pH Treated water
2. SW 2. PNL 2. CHTA mth): Chemical contam. (dv) Precipitation
3. Av: 27.67 3. n = 540 3. Polynomial Chemical cost per 100 million
Mn: 1.08 (i = 12, t = 45) gallons of output per month.
Mx: 109.76
Ernst et al. (2004) 1. USA 1. DWTP 1. Cost function Total costs (USD/MGL/yr): Land use (%):
2. SW 2. CRS 2. OLS O&M and amortized capital costs per Forest
3. n = 27 3. Polynomial MGL of output per year. Non-forest (ref)
Fiquepron et al. (2013) 1. France 1. Dept. 1. Price function Consumer price (EUR/m3): Nitrate GW/total intake (%)
2. SW & GW 2. CRS 2. IV-GMM Average price per m3 of residential- Pesticide exceedance Population density
3. Av: 0.16 3. n = 93 3. Linear use water based on consumption of Land use (%): Private/total systems (%)
Mn: 0.03 120 m3/year. Aggregation to the Forest
Mx: 0.63 department level is based on survey Grassland
weights from a stratified sampling VIARMA
procedure. Urban/agriculture (ref)
Forster et al. (1987) 1. USA 1. DWTP 1. Cost function Chemical costs (USD/day): Turbidityc Treated water
2. SW 2. PNL 2. OLS Average daily chemical costs over Sediment load Retention time
3. Av: 3.53 3. n = 257 3. Log-linear month period.
Mn: 1.04 (i = 12, t = 25)
Mx: 23.34
(continued on next page)
Ecological Economics 151 (2018) 195–209
 Table A (continued)

Reference Data characteristics Data structure Analysis approach Dependent variable Water quality measure Control variables
1. Country 1. Unit of obs. 1. Model type
2. Source type 2. Data type 2. Estimator
3. Output (Y) in 3. # obs.a 3. Specification
J.I. Price, M.T. Heberling

1000 m3/day

Forster and Murray (2007) 1. USA 1. DWTP 1. Cost function Chemical costs (USD/MGL/yr): Turbidity Treated water
2. SW 2. PNL 2. OLS Chemical costs per MGL output per Pesticide load
3. Av: 12.71 3. n = 55 3. Log-linear year. Land use (%):
Mn: 0.23 (i = 11, t = 5) Tilled w/ < 15% residual
Mx: 53.40 Tilled w/ 15–30% residual
Ridge/mulch tilled (ref)
Untilled
Non-agriculture
Freeman et al. (2008) 1. USA 1. DWTP 1. Cost function Chemical costs (USD/MGL/yr): TOC Year (dv)
2. SW 2. CRS 2. OLS Chemical costs per MGL output per WQI
3. Mn: > 3.79 3. n = 40 3. Semi-log year. Land use (%):
Mx: < 378.54 Forest
Urban
Non-forest vegetation
Heberling et al. (2015) 1. USA 1. DWTP 1. Cost function O&M costs (USD/1000 GL/day): Turbidity Lagged costs
2. SW 2. TMS 2. ECM, MLE Chemical, pumping, and GAC costs pH Treated water
3. Av: 18.74 3. n = 1826 3. Log-linear per 1000 GL of output per day. TOC Process shutdown (dv)

205
Mn: 2.01 Phosphorus load Pool elevation
Mx: 38.31 Temperature > 23 °C (dv) Years (dv)
Spring & summer (dv)
Actual TOC measure (dv)
Holmes (1988) 1. USA 1. CWS 1. Cost function O&M costs (1000 USD/yr): Turbidity Treated water
2. SW 2. CRS 2. OLS Chemical, labor, energy, water Sediment load Price of labor
3. Av: 163.43 3. n = 132 3. Log-linear acquisition, and distribution costs Price of electricity
per year.
Honey-Rosés et al. (2014) 1. Spain 1. DWTP 1. Energy use func. Energy usage (kWh/m3/interval): Conductivity
2. SW 2. TMS 2. OLS Amount of energy used per m3 of
3. Av: 82.19 3. n = 247 3. Linear output per daily/sub-daily interval.
Horn (2011) 1. Japan 1. CWSb 1. Cost function Total costs (Million JPY/yr): TOCc Treated water
2. SWb 2. CRS 2. SCF, MLE Source water intake, purification, Price of labor
3. Av: 38.47 3. n = 392 3. Log-linear distribution, dedicated construction, Price of capital
Mn: 0.58 operation, depreciation, and
Mx: 1109.48 inventory shrinkage costs per year.
McDonald and Shemie 1. USA 1. Muni. 1. Cost function O&M costs (Million USD/yr): Sediment load
(2014) 2. SW 2. CRS 2. OLS O&M costs per year. Phosphorus load
3. n ≈ 100 3. Linear
Moore and McCarl (1987) 1. USA 1. DWTP 1. Chemical use func. Chemical usage (lbs/day): Turbidity (Eq. (1)) Treated water (Eq. (1))
2. SW 2. TMS 2. COAC Amount of alum (Eq. (1)) and lime Temperature (Eq. (1)) Alum (Eq. (2))
3. n = 963 3. Eq. (1): Log-linear (Eq. (2)) used per day. pH (Eq. (2))
Eq. (2): Linear
(continued on next page)
Ecological Economics 151 (2018) 195–209
 Table A (continued)

Reference Data characteristics Data structure Analysis approach Dependent variable Water quality measure Control variables
1. Country 1. Unit of obs. 1. Model type
2. Source type 2. Data type 2. Estimator
3. Output (Y) in 3. # obs.a 3. Specification
J.I. Price, M.T. Heberling

1000 m3/day

Mosheim (2006) 1. USAd 1. CWS 1. Cost function O&M costs per year (USD/yr): Turbidityc Treated water
2. SW & GW 2. CRS 2. SUR, NL-ILS Chemical, labor, and energy costs Price of labor
3. Av: 131.93 3. n = 184 3. Translog per year. Price of electricity
Price of chemicals
Capital stock
Combined W&WW (dv)
Source is SW (dv)
Source is GW (dv)
Population > 100,000 (dv)
Network density
Res./total deliveries (%)
Mosheim and Ribaudo 1. USAd 1. CWS 1. Cost function O&M costs per year (USD/yr): Nitrogenc Treated water
(2017) 2. SW & GW 2. CRS 2. SCF, MLE Chemical, labor, and energy costs Price of labor
3. Av: 146.81 3. n = 48 3. Log-linear per year. Price of electricity
Price of chemicals
Capital stock
Agriculture/total N (%)

206
Murray (2001)e 1. USA 1. DWTP 1. Cost function Chemical costs (USD/MGL/yr): Turbidity Treated water
2. SW 2. PNL 2. OLS Chemical costs per MGL of output Pesticide load
3. Av: 58.32 3. n = 65 3. Log-linear per year. Land use (%):
Mn: 2.15 (i = 13, t = 5) Tilled w/ < 15% residual
Mx: 181.51 Tilled w/ 15–30% residual
Ridge/mulch tilled (ref)
Untilled
Non-agriculture
Oklahoma Water 1. USA 1. DWTP 1. Cost function Chemical cost (USD/MGL/mth): TOC
Resources Board 2. SW 2. TMS 2. OLSb Monthly average of chemical costs
(2011) 3. n = 12 3. Linear per MGL of output across eight-year
period.
Piper (2003) 1. USAd 1. CWS 1. Price function Consumer price (USD/GL): Calcium carbonatec Treated water
2. SW & GW 2. CRS 2. 3SLS Average price per GL of residential- GW/total intake (%)
3. n = 309 3. Log-linear use water. Source is GW (dv)
Population density
Debt/assets
Regions (dv)
(continued on next page)
Ecological Economics 151 (2018) 195–209
 Table A (continued)

Reference Data characteristics Data structure Analysis approach Dependent variable Water quality measure Control variables
1. Country 1. Unit of obs. 1. Model type
2. Source type 2. Data type 2. Estimator
3. Output (Y) in 3. # obs.a 3. Specification
J.I. Price, M.T. Heberling

1000 m3/day

Price et al. (2017) 1. Canada 1. DWTP 1. Cost function O&M costs (1000 CAD/yr): Turbidity Treated water
2. SW & GW 2. CRS 2. SCF, MLE Chemical, labor, and energy costs for Price of labor
3. Av: 12.88 3. n = 994 3. Log-linear source water acquisition and Price of electricity
treatment per year. Price of chemicals
Capacity
Conventional treat. (dv)
Filtration treat. (dv)
Disinfection treat. (dv)
Membrane treat. (dv)
Other treat. (dv)
Source is SW (dv)
Renzetti (2001) 1. Canada 1. CWSb 1. Cost function Total cost (CAD/yr): WQI Treated water
2. SW 2. CRS 2. SUR, ILS Labor, energy, and capital costs per Price of labor
3. n = 40 3. Translog year. Price of electricity
Price of capital
Water availability
Var. of water availability

207
Source is lake (dv)
Singh and Mishra (2014) 1. India 1. DWTP 1. Cost function Chemical/O&M costs (INR/ML/ Turbidity Lagged costs
2. SW 2. TMS 2. OLSb mth): Land use (%): Treated water
3. Av: 1310.00b 3. n = 144 3. Eq. (1): Log-linear Chemical costs per ML of output per Forest
Eq. (2): Log-linear month (Eq. (1)). Chemical, energy, Non-forest (ref)
repair, maintenance, establishment,
and transport costs per ML of output
per month (Eq. (2)).
Vincent et al. (2016) 1. Malaysia 1. DWTP 1. Cost function O&M costs (MYR/mth): Land use (%): Treated water
2. SW 2. PNL 2. Panel FE Chemical, labor, energy, and Virgin forest DWTP upgrade (dv)
3. Av: 12.61 3. n = 3894 3. Log-linear maintenance cost per month. Logged forest Precipitation
Mn: 0.06 (i = 41, t = 168) Non-forest (ref) Years (dv)
Mx: 147.70 Months (dv)
FE-DWTP
(continued on next page)
Ecological Economics 151 (2018) 195–209
 Table A (continued)

Reference Data characteristics Data structure Analysis approach Dependent variable Water quality measure Control variables
1. Country 1. Unit of obs. 1. Model type
2. Source type 2. Data type 2. Estimator
3. Output (Y) in 3. # obs.a 3. Specification
J.I. Price, M.T. Heberling

1000 m3/day

Warziniack et al. (2017) 1. USA 1. DWTP 1. Cost function Chemical costs (USD/MGL/yr): Turbidity Treated water
2. SW 2. CRS 2. OLS Chemical costs per MGL of output TOC Conventional treat. (dv)
3. Av: 183.70 3. n = 37 3. Log-linear per year. Land use (%): Filtration treat. (dv)
Mn: 0.20 Forest Disinfection treat. (dv)
Mx: 4163.90 Urban Advanced treat. (dv)
Non-forest/non-urban (ref)

Notes. Data characteristics: GW = groundwater; SW = surface water. Data structure: DWTP = drinking water treatment plant; CWS = community water system; CRS = cross-sectional data; PNL = panel data;
TMS = time series data. Analysis approach: COAC=Cochrane-Orcutt autocorrelation; CHTA = cross-sectional heteroskedastic and time wise autocorrelation; ECM = error correction model; FE = fixed effects; IV-
GMM = instrumental variable generalized methods of moments; ILS = iterative least squares; MLE = maximum likelihood estimator; NL-ILS = nonlinear iterative least squares; OLS = ordinary least squares;
SUR = seemingly unrelated regression; SAC = spatial autocorrelation; SCF = stochastic cost frontier; 3SLS = three stage least squares. Dependent variable: CAD = Canada dollar; EUR = euro; GL = gallons;
GAC = granular activated carbon; INR = India rupee; JPY = Japan yen; O&M = operation and maintenance; MYR = Malaysia ringgit; MGL = million gallons; ML = million liters; USD = USA dollar. Water quality
measure: TOC = total organic carbon; VIARMA = vine cultivation, arboriculture, and market gardening; WQI = water quality index. The term load is used to identify water quality measures that pertain to the amount of
material entering surface water due to runoff. Reference land use categories, dummy variables, percentage/proportion variables are denoted by (ref), (dv), and (%), respectively.
a
Total number of observations are denoted by n. For panel data, n is decomposed into the number of panel observations i and time observations t.
b
Information based on available evidence but uncertainty exists regarding the unit of analysis, estimator, or definition of the dependent variable. Additional information is available in Appendix B.
c
Variable is defined as the difference between source water and treated water quality.
d
Study uses data from the 1996 American Water Works Association member survey.
e

208
Entry pertains to the Great Lakes Basin analysis; characteristics of the Maumee River Basin analysis are reported in Forster and Murray (2007).
Ecological Economics 151 (2018) 195–209
J.I. Price, M.T. Heberling
Appendix B. Supplementary Data
Supplementary data to this article can be found online at https://doi.org/10.1016/j.ecolecon.2018.04.014.
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