OPTIMAL ECONOMIC MANAGEMENT OF GROUNDWATER

QUANTITY AND QUALITY: AN INTEGRATED APPROACH

A Thesis

Presented to

The Faculty of Graduate Studies

of

University of Guelph

by

OSWALD ZA-

In partial Mfïhent of requirements

for the degree of

Doctor of Philosophy

January, 1999

O Oswald Zachariah
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 OPTIMAL ECONOMIC MANAGEMENT OF GROWWATER

QUANTlTY AND QUALïN: AN INTEGRATED APPROACH

Oswald Zachairiah Advisor:

University of Guelph, 1999 Professor Kimberly Rollins

Loosely d&ed institutional arrangements for groundwater give rise to externazities

that hasten the depletion and degradation of the resource, thus reducing potentid economic

benefits. Implementing policy mesures to correct perceiveci extraction or poliution

externalities is an approach often proposed. This thesis contributes to the discussion by

suggesting that the correct management approach is one that accounts for the econornic

hterrelationships between extractive and non-extractive uses of the aquifer. hterrelationships

are examuied with the aid of a dynamic prograrnming model that maximizes the net present

value of drinking water benefits and agicultural waste assirrEIation benefits under (a)cornmon

pool institutional arrangements and (b) integrated management arrangements. Agricultural

waste assimilation in the aquifer is used to model the non-extractive use.

A central result of the optimization problem is that optimal choices of groundwater

extraction and agricdtural waste assirnilation are determi.mil sirnultaneously in an integrated

management approach. Thus, a common pool groundwater management r e m or any regime

that ernphasizes only one area of concern (e.g., extraction or pollution) will be sub-optimal

The model is applied to an aquifer management problem in W h o t Township,

Ontario. Extractive benefits are measured using water demand functions. Agricultural waste

assimilation benefits are obtained using f m e r s ' marginal abatement cost functions for
nutrient waste. Empincal results show the present value of aquifer benefits achieved under

current common pool institutionalarrangements, are suboptimat Where the cost of switching

nom one management approach to anotha is zao, die integrated approach is always optimal.

The estimated welfare loss under common pool institutions is l e s than 1% of potential

econornic benefits under an integrated approach. The policy implication for groundwater

management in Ontario is that high irnplementation costs associatd with an integrated

approach could exceed the potential benefit, thus rnaking the cornrnon pool outcome

desirable.

Non-integrated groundwater management regimes intended to address extraction or

pollution extemalities without accounting for economic interrelationships could yield lower

aquifer benefits than under the current comrnon pool regime they were meant to irnprove.

Factors iduencing the optimal allocation of activities most are the marginal value of

the aquifer for waste assimilation, the naaual rate of decay of nutrient in groundwater, the

cost of treating water for nutrient contamination, and the marginal benefit function of

groundwater extracted, respectively.

 Acknowledgment

I cheerfülly acknowledge the assistance of an excellent supervïsory cornmittee

consisting of Dr. Kimberly Rollins, Professor Glenn Fox, Dr. Alfons Weersink, Dr. John

Ftzgiibon and Dr. Donald Tate. As academic advisor, Kim encouraged creativity and never

stopped cheering "You're doing great!" until the last line was d e n . Kim, 1 am extremely

happy that things went so weR Glenn's perceptive comments challenged me to go m e r and

to think more deeply. Thank you, Al, for assisting me during this research and the invaluable

encouragement in other areas. And John, thanks for givïng me professional o p p o d t i e s

outsï.de the classoom Don, 1 feel pxÂdeged having benefited fiom your vast experience and

unrnatched humour. Also, I thank Dr. Steven Renzetti and Dr. Rob de Loë for serving as my

external examiners, and Dr. Tom Michaels for chairing my oral examination.

1 am indebted to Scott Nancekivell of the Township of Wilrnot and Mike Murry of

The Region of Waterloo for helpful cornrnents and information. The Ontario Ministry of

Agricul~e,Food and Rural Affairs provided research funding.

Thank you Audrey Donley, Debbie Harkies and the rest of the department staff who

were very helpful over the years, to colieagues (Nayak, Sylvain, Clea, Danny, Yusman and

Anne-J) for sharing the "joys" of comprehensive preparation and for king suppomve friends.

Life in Guelph over the years was not aIl work. 1 thank the guys of the Guelph

Vineyard Band for the chance to jam with them and record two CDS.Finally, to my wife and

kids (l?hyllis, Neb, Nola and Srnokey) who kept holding on in love and prayer: "Thanks for

being m e . 1 owe this one to you".

 Table of Contents

Chapter 1 Introduction ................................................ 1

Rationale for the Research .................................... - 2
1.1.1 Growing Demand ...................................... 2
1.1.2 Extemalities ..........................................4
1.1.3 Detenorating Groundwater Quality ....................... - 5
The Economic Problem ......................................- 5
An Economic Research Problem ............................... - 8
General -ose and Objectives ............................... 11
Methods .................................................. 12
1.5.1 Objective 1 .......................................... 12
1.5.2 Objective 2 .......................................... 13
1.5.3 Objective 3 .......................................... 15
1.5.4 ScopeofStudy ....................................... 16
1.5.5 Contributions of the Smdy ..............................17
OrganizationofDissertation ..................................18

Chapter 2 The Problem With Groundwater Management Policy In Ontario ..... - 2 0

2.1 Introduction ............................................... 20
2.1.1 Overview of chapter ..................................- 2 1
Groundwater Management In Ontario .......................... - 2 2
2.2.1 Pollution Control Policy ............................... 7 3 --
2.2.1.1 Federal Legislation .............................. 22
2.2.1.2 Provincial Statutes Affecting Groundwater Quality . . . - 2 3
2.2.1.3 Groundwater Quality Management Programs of OME . - 2 6
2.2.1.4 Roles of Municipalities and Conservation Authorities . - 2 8
2.2.1.5 Special Activities .............................. - 2 9
2.2.2 Groundwater Extraction and Allocation Policy .............. 30
2.2.2.1 Cornmon Law Influence ........................ - 3 0
2.2.2-2 Statutory Provisions for Groundwater
Quantity Management . . ......................... 30
2.2.2.3 Groundwater Quantity
Management Programs of OME .................. - 3 1
2.2.2.4 Municipal Role in Quaxitity Management ............ 32
A Critique of Groundwater Management in Ontario ................33
2.3. t Groundwater Allocation ............................... - 3 4
2.3.2 Groundwater Pollution ................................- 4 0
Internalizing Groundwater Externalities: A Bnef Review ........... - 4 3
2.4.1 Groundwater Extraction Models ........................ - 4 4
 2.4.1.2 Groundwater and Private Property ................. -47
2.4.2 Groundwater Quality Models .......................... -50
2.4.3 The Missing Links .................................... 52
2.5 Integrating Quality and Quantity in Groundwater Policy ........... - 5 3
2.5.1 The Reason For An Aitemative Approach ................ - 5 4
2.5.1.1 Irnplementation Costs .....................56
Conclusion .......................................... 58

Chapter 3 An Integrated Quality-Quantity Model For

Groundwater Management .................................... 59
Introduction ............................................... 59
D i s s d a r Uses and Costs of Groundwater Use ................... 61
3.2.1 Extractive Use ...................................... - 6 1
3 - 2 2 Non-Extractive Use .................................. - 6 3
3.2.3 Externalities ......................................... 67
A Dynamic Prograrnming Mode1 For Optimal Aquifer Use ......... - 6 8
3.3.1 Structure Of The Dynamic Programming Problem .......... - 6 9
Groundwater Utilization Under Private Decisions ................. 70
3.4.1 Common Pool Outcome of Privately Supplied Extractor ..... - 7 2
3.4.2 Cornmon Pool Outcorne Of The Municipal Extractor ......... 75
3.4.3 Comrnon Pool Outcome With Onsite Disposal ............. - 7 6
Groundwater Utilization Under the Social Optimum .............. - 7 9
3.5.1 The Marginal Cost of Onsite Disposal .................... - 8 1
3.5.1.1 Analfical Results .............................. 83
Discussion and Sumrnary .................................... 92

Chapter 4 An Ernpirical Study of the Optimal Levels of

Groundwater Extraction and Onsite Disposal ..................... 96
4.1 Introduction ............................................... 96
4.1.1 Outline of the Chapter .................................97
4.2 StudyArea ................................................98
4.3 The Aquifer Problem Revisited ............................... 101
4.3.1 Extractive Groundwater Users .......................... 102
4.3.2 Non-Extractive Groundwater Users ...................... 104
4.3 -3 Cost of Purnping and Treating Water .................... 106
4.3.3.1 Variable Pumping Cost ......................... 106
4.3.3.2 Cost of Treatment ............................. 109
4.3.3.3 The Dynamics of Nitrate Contamination ........... 113
4.3.4 Fixed Costs ..................* , .
.........*........116
4.4 Hydro-geology of Wilmot Area ............................... 117
4.4.1 Groundwater Stock Equation cf Motion .................. 121
4.5 Resuits .................................................. 122
 4.5.1 Optimal Solution ...................................... 125
4.5.2 Non-Optimal Solutions ............................... 129
4.5.2.1 Cornmon pool approach ........................ 129
4.5.2.3 Quantity focussed approach ...................... 135
4.5.3 Distribution of Benefits Under Different Approaches ........ 143
Sensitivity Analysis ........................................ 147
4.6.1 Increased benefit fünctions for onsite disposal and extraction . 147
4.6.2 Change Treatment cost ............................... 151
4.6.3 Change Decay Rate .................................. 153
4.6.4 Change Pumping cost ................................ 155
4.6.5 Other Sensitivities ................................... 157
s m a r ~ ...................................... 159

Chapter 5 Policy Implications For Groundwater Management ............... 161

5.1 Introduction .............................................. 161
5.2 Review of Empirical Resdts ................................. 162
5.3 Irnplementing an Integrated Approach ......................... 165
5.3.1 Operational Changes ................................. 166
5.3.1.1 Discontinued Exemption for
Self-Supplied Extractors .............................. 170
5.3.1.2 Clarification of Agricultural Exemption from
Water Quality Statutes .......................... 171
Decision Rule for Changinp Management Approach .............. 172

Chapter 6 Conclusion ............................................... 175

6.1 Sumrnary of Research Results ................................ 175
6.2 Theoretical and Empincal Contributions of Integrated Approach ..... 177
6.3 Limitations of The Smdy .................................... 179
6.4 Further Research .......................................... 180

References ........................................................... 182

Appendices .......................................................... 193
 List of Tables

Table 3.1 Effects of Changes in Selected Exogenous Variables On Rates of

Groundwater Withdrawals and Onsite Disposals:
Static Analysis Under the Social Optimum ...................... -87
Table 4.1 Data Requirements For Optimization .......................... 103
Table 4.2 Comparative Water Treatment Costs ........................... 112
Table 4.3 Hydrological Data Used In The Integrated Mode1 ................. 122
Table 4.4 Explanation Of Functions and Coefficients Used
in Base Solution of the htegrated Mode1 ....................... 123
Table 4.5 Net Present Vdue of Annual Benefits
To Users of Wilmot Aquifer Socially Optimal Outcome ........... 126
Table 4.6 Socially Optimal Time Path of Stock and Decision Variables ....... 127
Table 4.7 Net Present Value of Annual Benefits To Users of Wilrnot Aquifer
Common Pool Outcorne ..................................... 130
Table 4.8 Cornmon Pool Time Path of Stock and Decision Variables ......... 132
Table 4.9 Net Present Value of Annual Benefits To Users of Wilmot Aquifer
Quality Focussed Approach .................................. 134
Table 4.10 Quality Focussed Time Path of Stock and Decision Variables ....... 136
Table 4.1 1 Net Present Value of Annual Benefits To Users of Wilmot Aquifer
Quantity Focussed Approach ................................. 138
Table 4.1 2 Quantity Focussed Time Path of Stock and Decision Variables ...... 139
Table 4.13 Net Present Value of Annual Benefits To Users of Wilmot Aquifer
SeparateApproach ......................................... 141
Table 4.14 Time Path of Stock and Decision Variables Separate Approach ...... 142
Table 4-15 Net Present Value of Five Groundwater Management Approaches ... 144
Table 4.16 Distribution of Benefits Under Five Groundwater
Management Approaches .................................... 144
Table 4.17 Differences in The Distribution of Benefits
Each Approach Compared To The Optimal Outcome .............. 144
Table 4.18 Net Present Value of Five Groundwater Management Approaches ... 149
Table 4-19 Distribution of Benefits Under Five Groundwater
Management Approaches ....................................149
Table 4.20 Differences in The Distribution of Benefits
Each Approach Compared To The Optimal Outcome .............. 149
Table 4.2 1 The Effect of Treatment Cost On Total Withdrawals.
Onsite Disposa1 and Depth of Water Table ...................... 152
Table 4.22 The Effect of Nitrate Decay Rate On Total Withdrawals.
Onsite Disposal and Depth of Water Table ...................... 154
Table 4.23 The Effect of Pumping Cost On Total Withdrawals.
Onsite Disposal and Depth of Water Table ...................... 156
Table 4.24 Sensitivity Elasticities of Present Value of Benefits,
Groundwater Extraction and Onsite Disposai to
Changes in SeIected Exogenous Variables . . . . . .,... . . .. ... . .. . . 158
Table 5.1 Net Present Value of Welfare Losses Associated With
Four Non-Optimal Management Approaches . . . - - .. .. . .. .. . . . . . , 164
 List of Figures

Figure 2.1 External Effects of Groundwater Withdrawal Under Surplus and

Deficit Conditions ......................................... - 3 6
Figure 3.1 Graphical Derivation of the Benefit Function For On-site Disposal ... -67
Figure 3.2 Effect of Change in Pumping Technology on Groundwater
ExtractionandAllocation .................................... 90
Figure 4.1 Map Of The Regional Municipdity of Waterloo
Within Southwestern Ontario ................................ 100
Figure 4.2 Relationship Between Onsite Disposd And Water Quality In Aquifer . 1 16
Figure 4.3 Simplified Representation of Wilmot Aquifer .................... 1 19
Fiapre 4.4 Sensitivity o f groundwater Stock To Changes in Planning Horizon ... 124
Figure 4.5 Cornparison of Withdrawal: Optimal, Quality Management and
CornmonPool ............................................ 146
Figure 5.1 Present Value of Benefits From Aquifer ........................ 163
 Chapter 1

Introduction

Groundwater plays an important role in maintaining the integrity of ecosystems and

the viability of mmy economic activities in Ontario. It has become the cheapest source of

potable water among alternative options that include surface water treatment, diverting clean

surface water over long distances, and desalination. The resource is threatened with

overexploitation and contamination by a number of human activities (Ontario, 1992). Yet,

the activities that threaten groundwater cannot be cornpletely elirninated because they

provide important economic benefits. Thus, an important management problem that emerges

is to determine how the beneficial services of an aquifer should be allocated over time and

between different users.

This thesis contributes to the discussion of two important issues in aquifer

management. First, what approach should a groundwater manager adopt to determine the

economically optimal inter-temporal rate of water extraction from an aquifer and the optimal

level of groundwater q u a l i ~degradation?

j Second, if such an approach is designed, to what

extent can it be implemented within current institutional arrangements in Ontario?

The first issue involves groundwater quality and quantity concerns, which have been

studied separately by several researchers (e.g., Abler and Shortle, 1991, Burt, 1964,Lintner

and Weersink, 1998, Mapp et al., 1994, Meinzen-Dick, 1996, and Metzger, 1986)-However,

linkages between groundwater quality and quantity management need to be analysed since

they are widely acknowledged by groundwater researchers and managers. By not formally

1
recognizing the interdependence of the two issues, most studies about the optimal use of

groundwater resources have missed the potential economic insight from doing so. This

research provides some dues about the value of information gained from a management

approach that explicitly integrates effects of groundwater quality and quantity. In this

introductory chapter the practical and theoretical motivation for this approach is presented.

The second issue is based on an examination of institutional arrangements for

groundwater in the province and how these could be the sources of welfare losses. This issue

was first examined by Campbell et al. (1974).However, the evaluation did not involve

esùrnating the welfare loss due to specific institutional arrangements. Also, the evaluation

by Campbell et al. is dated and does not reflect recent policy changes. This dissertation

provides some economic estimates of the welfare losses resulting from current institutional

arrangements.

1.1 Rationale for the Research

The rationale for this study emerges from three concerns about groundwater in

Ontario: growing dernand, pumping cost externalities, and deteriorating water quality. The

study addresses some practical groundwater management problems of econornic importance

and the need for research to address them-

1.1.1 Growing Demand

Groundwater represents about 6% of the total water supply of Ontario. Yet, 13 % of

Ontario's municipal population is reliant on groundwater water supply systems. Close to

100% of Ontario's rural residents depend on groundwater provided by private wells.

Together, pnvate and municipal wells satisQ about 23 % of the province's water demand

(Environment Canada, 1995). Total groundwater extraction is distributed between municipal

use (51%), rural domestic use (i8%), agriculturai use (23%) and industrial use (8%).

The importance of groundwater as a source of fresh water in Ontaïo and in Canada,

generaily, is expected to increase because groundwater is the primary source of Low cost

potable water (Karvinen a d McAUister, 1994).' The average variable cost of supplying

groundwater usually requiring little or no treatment could be as low as 40 Q of the cost of

surface supply that generally requires treatment (Woeller and Donaldson. 1997).

Growing urban population with the corresponding increase in demand for municipally

supplied water has considerably increased Ontario's groundwater extraction and the

probability of exhausted wells during tirnes of drought (Kreutzwiser, 1996, and

(Schellenberger and Piggott, 1998). Some municipal suppliers ( e g Guelph) have already

found it necessary to engage in artificial recharging of aquifers because extraction has

substantially outsvipped recharge.

Long term per capita water demand (ground and surface) is also increasing in some

municipalities. In 1992, it was projected that over the next two decades, 30% more water

would be required to satisQ Ontario's growing demand (Ontario, 1992).The combined trends

have raised new concems about the availability of water to rneet demands of al1 users in the

next few decades (Sharratt et al. 1994). Consequently, water managers need to know how

Some authon consider a water demand management program that reduces the per capita
consumption of water and rnakes more water available as the primary source of low cost water (e-g. Tate,
1984). However, this dissertation considers water dernand management as a nrethod of management rather than
a source of supply.
critical water quantity conservation is relative to other water management issues.

1.1.2 Externalities

Expanding groundwater extraction fiom growing rural and municipal populations

could generate pumping cost externalities. A pumping cost extemality is the increased cost

of pumping incurred by extractors of groundwater due to the decline in the water table caused

by another extractor. The decline of the water table may occur due to a general decline in the

level of water in the entire aquifer or as a result of gromdwater interference. The latter is a

locaiized problem that occurs when a high rate of groundwater extraction causes the water

table around that well to fa11 to such an extent that the flow of water to other wells is

intermpted.

Leadlay (1996) reports that the multiplication of private wells with increased large

scale extraction has been associated with cornplaints of groundwater quantity reduction in

some private wells of Ontario. A rural water supply survey of 185 self supplied water users

by Kreutzwiser (1996) supports Leadlay's reports. Interference may be only an

inconvenience if the interruption of supply is intermittent, but it can induce high costs if

afTected extractors must deepen their wells. Further, as municipal water supply systems

expand to meet the demands of the growing populations, it c m be expected that the number

of interference problems will increase.

The pumping externality arising from the general decline of the water table (rather

than groundwater interference) exists where total groundwater extraction exceeds the optimal

arnount and transfers extra costs to al1 groundwater users (see 2.3). Water managers,
therefore need to examine this issue to determine if such a problem exists and how to resolve

it,

1-13 Deteriorating Groundwater Quality

In addition, groundwater pollution has emerged as a serious problem for some

extractive users. Domestic sewage treatrnent systems, animal waste disposai, and fertilizer

use, threaten the availabIe stocks of potable water in Ontario by increasing the concentration

rates of contaminants (Canada, 1992 and Cherry, 1987)- A 1992 survey of Ontario's

groundwater quality by Rudolph and Goss (1992) showed that 13 % of the weils failed to

meet the provincial drinking-waterstandards for nitrate nitrogen and 32 % of wells failed to

meet the standard for faecai coliform. In addition, different soi1 management practices, and

different fertilization intensities contribute (to varying degrees) to the water quality problem

(Hamiet and Epp, 1994 and Kachanoski and Rudra, 1992).

Deteriorating groundwater quality necessitates the development of new supply

sources by municipal water suppliers, which is costly. If new sources are unavailable,

impaired groundwater must be treated at greater costs (Murray, 1995). For self supplied

extractors who may not have access to treatment plants, the cost of contamination is an

increased health nsk or the cost of procuring alternative, safe supplies of water (O'Neil and

Raucher, 1990).

1.2 The Economic Problem

Ontario's approach to these water quantity and water quality problems has been based

primarily on statutes that are not designed to facilitate efficient water resource management
outcomes (e-g., water permit system). Two factors explain the shortcomings. The first is the

unintegrated nature of decision making by authorities responsible for groundwater quantity

management and those responsible for groundwater quality protection. The second is the fact

that adequate attention is not paid to the economic value of extractive and non-extractive

activities affecûng the aquifer? (These issues are developed in chapter 2).

The outcome of an unintegrated approach in which decisions are made without the

benefit of economic information is that efficiency cannot be guaranteed. It may be that

resources are being wasted. Thus, groundwater managers should consider an alternative

grounawater management approach that integrates the quantity and quality concerns of

aquifer management into an environment where economic information plays a more central

role in decision making.

At the centre of the groundwater management probleni is the existence of external

costs caused by the sub-optimal use of groundwater. These external costs (or extemalities)

are incurred because groundwater users do not consider the effects of their actions on the

welfare of other users.) Unless the institutional environment constrains them to do otherwise,

individuals base decisions on the balance between marginal private benefits and niarginal

private costs. But, (assuming no external benefits exist), society's welfare is maxirnized

when individuals' decisions are based on the balance between marginal private benefits and

marginal private costs plus external costs (Baumol and Oates, 1988). The existence of

2
Non-extractive uses are ail activities that benefit from the aquifer without the human activity of
exmcting groundwater.
3
Throughout this thesis, Cowen's definition of externality is used: "An externality is said to exist
when ..." (Cowen, 1979).
externaiities (whether caused by water table depletion or quality deterioration), indicates that

some individuals are creating more costs for other groundwater users than the private

benefits they receive.

In Ontario, extematities are perpetuated by the structure of property rights," which

makes groundwater a cornmon pool resource.' This being the case, individual users have

little incentive to conserve groundwater stocks since one user's conservation could facilitate

another user's extraction. There is also Iittle incentive to reduce groundwater pollution

because voluntary action is not financially compensated or reciprocated.

Conceptually, extemality problems can be solved by redefining the structure of

property rights by issuing exclusive titles for al1 aspects of groundwater resources (quality

and quantity). Voluntary exchange, involving the purchase of water rights or pollution rights,

could then occur between groundwater owners and users (Dales, 1968). However, this

solution would likely not gain legitimacy in Ontario where govemment is involved in

environmental issues primarily because of the difficulties of establishing market solutions.

Further, the establishment of property rights in groundwater does not necessarily

solve the problem of excessive extraction (Andrews and Fairfax, 1984). Owners of water

stocks may simply try to avoid higher purnping costs by extracting their share of groundwater

earliest. Neither do property rights for groundwater quality simpliQ the problem The diffuse

4
With respect to a particular quantity or quality of water, a property right is the assurance that an activity
will be protected and enforced by the legaI and social systems o f society (Goldfarb, 1988)- This definition will
prove critical later in deten-nining the nature o f provinciat property rights over groundwater.
5
Ostrom et al.(I994) use the term comrnon pool to refer to rivalrous resources characterized by (a)
institutional arrangements (iaws and customs) that assign overlapping rights to various users and (b) high
transaction costs that prohibit negotiation.
nature of most pollutants and the large number of potentiai negotiators combine to make the

property rights solution conceivable but intractable (Baumol and Oates, 1988).

An alternative approach for managing groundwater is to adapt the institutionai

arrangements and decision making processes used by groundwater managers. If groundwater

managers have suitable information about the benefits of and costs of activities affecting the

aquifer, welfare gains can be achieved by determining the optimal amounts of these

activitiesb In practice, groundwater managers in Ontario are the Director of Water Resources

and various municipal authorities that re,gdate groundwater quality on behalf of the Ontario

Ministry of Environment. Welfare gains wouid be achieved as managers adopt a number of

policy measures to internalize the extemal costs of groundwater use. For example, special

price incentives can be applied to water extraction to reduce inefficient use, and measures

could be implemented to reduce the rate of groundwater quality degradation.

1.3 An Economic Research Problem

In order to determine the optimal amounts of activities affecting the resource,

groundwater managers must f m t choose a suitable approach as an alternative to what exists.

Identimng why an alternative approach is necessary, how it might be designed, and what

institutional changes are necessary, are the focus of this dissertation.

The problem faced by the groundwater managers (or central groundwater authorities)

is to maximize the present value of net benefits frorn an aquifer over a given planning

This need not involve cornrnand and controI approaches. Chapter 2 expIains how central groundwater
managers can determine optimal rates of activities whiIe leaving the allocation to be determined by market
mechanism.
horizon. Nurnerous groundwater optimization studies have been put forward addressing

aspects of this problem. In a general sense, these studies fa11 into two categones. Onc

category addresses the problem of groundwater stock management and the effects on

pumping costs, and water availability over time (e-g., Gisser and Sanchez, 1980, Feinerman

and Knapp, 1983, and Provencher and Burt, 1994). The other category deals with how the

management of goundwater qudity affects the economic well-being of extractors (e-g.,

Giraldez and Fox, 1995, Huang et a1.,1996, Lee and Leonard, 1990, and Young and

Congdon, 1994). In principle, both strearns of research address valid economic problems.

However, this study presents three reasons for a reexarnination of groundwater management

approaches.

F i t , groundwater managers must recognize the interrelationships between extractive

and non-extractive uses of the aquifer. Studies that focus exclusively on the groundwater

extraction problem implicitly assume that the non-extractive uses of groundwater can be

separated from their central groundwater extraction problem. In the process, they lose the

valuable information that interaction of water quantity and quality brings to the analysis.

Deciding on what type of problem exists is equivalent to assigning economic values to each

type of externality. Thus, a groundwater manager's conclusion that the rate of water

extraction needs to be lowered could be incorrect without a formd examination of the

interrelationships between the extraction and water quality. This points to the need for an

approach that identifies where ineffkiencies exist and what should be done to correct them.

Second, even if the relationship between water quality and quantity is recognized,

paying exclusive attention tc the extractive uses of groundwater may result in the non-
extractive benefits of groundwater resources being unaccounted. In addition to providing

extractive benefits, an aquifer provides the service of assimilating agriculturd waste, and

maintaining base flow for recreational sites and wiIdlife habitats. Counting only the clean

water benefits of the aquifer would lead to an underestimation of the value of the aquifer.

The above statement needs some explanation as it may not be obvious to all readers.

If farmers were required, under a Iiability rule, to reduce nutrient leaching from agicultural

fertilization activities, they would incur abatement costs in doing so. Each abatement effort

not taken is a cost avoided, resulting in reductions in the cost of farming and the price of

food. Thus, this dissertation treats the abatement cost avoided by farmers as a direct private

benefit of using groundwater for waste assimilation that should be included in the

optimization problem.

Other non-extractive benefits of the aquifer include: provision of water for soi1

support, erosion and flood control by absorbing surface mn-off, indirect support of wildlife

habitats (Bergstrom et al.. 1996). Bergstrom et al. argue that "..nonrecognition of these

services imputes a lower value for the groundwater resource in establishing policies" (p.279).

To facilitate discussion, this study highlights only one of the uses of the aquifer often

overlooked: waste assimilation. But it acknowledges that al1 of the other functions also

generate benefits. If groundwater management can be done in a manner that integrates

quantity and quality issues, and if a wider range of benefits can be accounted for, the results

of the selected management approach will be more reliabIe. Also, this will give policy

rnakers greater confidence regarding whether a quantity or quality problem should gain

priority.
 Third, if an integrated approach can facilitate optimal management of an aquifer, then

estimating the potential gain from implementing the integrated approach is an important

research objective. Estimating this potential gain would be the first step in determining

whether to change groundwater management policy.

Having determined how to establish optimal rates of groundwater extraction and

pollution, management responses may include various tools to encourage efficient choices,

e-g., tradeable groundwaterstock permits, tradeable pollution p e d t s , or more precise central

control, none of which is the focus of this study. But, irrespective of the instrument chosen,

some institutional bamiers may prevent easy movement from the current unintegrated

approach to the integrated efficient outcome. If decisions are based on effciency cnteria,

policy makers will decide whether to change institutional arrangements depending on the

potential benefits integration and the implementation costs of the institutional change. This

study estimates the potential benefits of institutional change but does not estimate

implementation costs. Chapter 2 indicates what these costs will most likely involve.

By providing insights to the preceding three areas of research. this dissertation will

make a contribution to the theoretical literature on groundwater utilization. Furthemore, by

applying the mode1 to a local problem, it will demonstrate the magnitude of eficiency losses

associated with the current approach to groundwater management in Ontario.

1.4 General Purpose and Objectives

The purpose of this dissertation is to show that in the presence of extraction and

pollution externalities pursuing aquifer management by integrating quantity and quality

relationships into a single econornic problem is optimal and results in a better understanding

of aquifer management problems than with nonintegrated approaches.

In order to achieve this primary objective, three secondary objectives have been set.

Objective 1. To present the case that an unintegrated approach to aquifer rnanagement,

such as that being pursr led in Ontario, will no? necessarily leud to an eficient
orttcotne-

Objective 2. To develop an economic mode1 of the aquzyer shoiving the eflect of any given
management approach on the present value of benefitsfrorn the aqui$er-

Objective 3. Tu apply the rnodel to an empirical case in Wilmor Township, Ontario, in

order to compare the current economic benefits of the Wilmot Aquïfier with
the potential economic benefits rtrzder arz integrated approach.

Each of the objectives rnentioned above will now be discussed in light of the methods used

to accompIish it.

1.5 Methods

While the details of the methods used in this study are presented in each specific

chapter, this section will give a brief ovewiew of the methods used through the entire study.

Presenting this overview will heIp to identify the transition from one objective to another.

1.5.1 Objective 1

Objective 1 is critical because it establishes the basis for the entire thesis. The thesis

must make the case that the present groundwater management approach is unintegrated and

that groundwater use efficiency is not guaranteed. The study assumes that the objective of

groundwater resource management is effxiency (Le., maximum value of net benefits frorn

groundwater use). This need not be the objective of groundwater policy (Campbell et al.,

12
1974)-Distributional or environmental objectives could be more important. However, the

efficiency cnterion is used to establish a consistent standard for comparing alternative

outcomes as information for environmentai and distributional criteria is not as easily

quantifïed.

This efficiency objective necessitates two important conditions. Fkt, irrespective of

the specific use to which groundwater is put, when the efficient outcome is achieved ail

groundwater users shodd achieve the same marginal value from each marginal unit (Spulber

and Sabbaghi, 19941- Second, efficiency in groundwater use is achieved when the net

marginal benefit of using a unit of the resource is equal to its inter-temporal user cost. The

latter is the lost future opportunity associated with the consumption of groundwater at the

present time. Groundwater is a depletable stock, once the rate of use exceeds the rate of

recharge. To use this resource efficientiy, a unit of groundwater should be used only if there

is no other time at which the resource can be used for greater net present value of economic

retums (Burt, 1964)-

The first objective is achieved mainly by exarnining current institutional

arrangements (statutes and operational policies) for groundwater management in Ontario îo

determine whether an efficient outcome is likely. This is supported by exarnining the

literature of groundwater management in the presence of externaiities to determine how best

groundwater management should be pursued.

1.5.2 Objective 2

Taking the dynamic efficiency conditions into consideration, a dynamic optirnization

model must be constmcted to accomplish objective 2. It must provide the flexibility to

analyse the problem theoreticaily and be relevant for empirical applications. A dynamic

prograrnmuig approach has been chosen. Provencher and Burt (1993 and 1994) have shown

that this approach is effective for anaiysing the pnvate and extemal costs associated with

groundwater use while remaining useful at the empirical level.

Since the benefits and costs of groundwater use are realized in different ways, the

model must accommodate these differences accordingly. Generdly, benefits arise from

groundwater extraction and fiom onsite disposa1 of waste using groundwater. The benefits

of extraction are measured using the demand functions of municipal and privately supplied

extractors. Benefits of onsite disposal are measured using the value of costs avoided by

farmers by not having to undertake expensive abatement activities. RecaIl that other uses of

the aquifer are not considered. Cost functions for groundwater extraction and cost functions

for groundwater pollution are based on groundwater pumping costs and treatment costs

respectively.

The mode1 involves no uncertainty, through this may be an important issue where

groundwater recharge is highly variable and where the effects of agicultural fertilization are

unpredictable. All variables that affect groundwater hydrology are assumed to be known by

the water managers (e-g., topography, aquifer rock type, groundwater flow patterns,

precipitation, retum flow and naturd discharge). The details of these assumptions are

presented in chapter 4.

A central groundwater authority (the water manager) assumes the roles of the

Ministry of Environment and the municipal planning authorities. And the social welfare of

groundwater users is rnaximized according to the eficiency criterion in each alternative

approach considered.

1-5-3 Objective 3

Objective 3 focuses on the policy implications of the model. Policy recommendations

from this study are more instructive within an empincal context. To provide the context,

Wilmot Aquifer is chosen for the application of the model. Once the optimal outcorne is

known, institutional change rnay be necessary as curent institutions rnay present barriers to

the efficient outcome (see chapter 2). For example, if an aquifer is being utilized sub-

optimally, policy instruments such as extraction charges. pollution taxes, or tradeable permits

rnay be used by the central groundwater authority to give users the incentives to conserve

groundwater. However, groundwater quality or quantity managers rnay not have the legal

authority to use policy instruments to manage and regdate al1 individuals that have access

to groundwater. One insûtutionai change that could contribute to groundwater use eEciency

is the removal from some groups of statutory exemptions from provincial groundwater

management decisions - making groundwater less a common pool resource.

Consequently, while this mode1 rnay assist the groundwater manager to detemiine the

appropriate rates of utilization for groundwater resources, at a policy level, it rnay not be

economically feasible for the central groundwater authorïty to implement an integrated

groundwater management policy because of the cost of institutional change. To determine

feasibility, the study compares

(a) the potential gains from implementing an integrated management approach, and

@) the potential implementation cos& of pursuing an integrated management approach.

While estirnates of the potential benefits are provided, estimates of implementation costs are
not offered, but the nature of the effort involved is discussed. if the potential gain from an

integrated approach is not substantial, it would be doubtful whether incurring high

implernentation costs to achieve that goal would be desirable.

15.4 Scope of Study

This study deds specifically with two areas of aquifer management: (1) determining

the optimal rates of extraction and (2) determining the optimal rates of onsite disposal. It

examines the marginal costs and benefits of extraction, the marginal costs and benefits of

onsite disposal, and the relationships between them- Emphasis is placed on decision making

at the margin. Little effort is allocated to other problems related to water economics,

including modelling Iurnpy variables such as acquisition cost of water pumping and water

treatment equipment.

A large part of water resource management deals with planning the appropriate size

of water distribution systems and waste water collection and treatment systems (Whipple,

1994). In some cases, over-sized water distribution systems have Seen the primary

inefficiency in water management (Young, 1986). While the study recognizes the issue, it

does not address the problem of efficiency in water distribution or treatment capacity.

Tt is beyond the scope of the study to prescribe the tools that should be used to

maintain achieve the optimal outcome. Reference to specific tools is made only to

demonstrate how practical an integrated could can be.

Further, onsite disposal of agricultural fertilization waste is the only non-extractive

activity evaluated. The primary reason for this is to get a better understanding of the

conflicting issues between aquifer management for potable water and agriculturd production.
In the process, the extemal cost of onsite disposa1 on the extractive water use is estimated,

but the extemal costs on other non-extractive water uses, such as cold water fishery and

surface water quality are not considered.

FhaIIy, institutional arrangements for groundwater use in Ontario are examined only

to identiQ the source of persistent extemality. Institutional issues in water resource

econornics are far more complex than may be presented here (e-g., see Scott and Coustalin,

1995, and Thompson, 1987)- Statutory law and related rules are taken as the concIusive

institutional arrangements for groundwater. Questions such as the emergence of groundwater

rights, and the legitimacy of statutory niles over groundwater are not addressed. However,

it is acknowledged that the perspectives of cornmon law, statutory law and constitutional Iaw

do not always coincide (Brubaker, 1995, Lucas 1990, Percy, 1988 and Thompson, 1987).

1.5.5 Contributions of the Study

This dissertation promises important contributions in three areas. First, it is the first

study (according to the literature reviewed) to combine water quantity problem with the

water quality problem in order to determine the economically optimal use of an aquifer. This

quantity-quality comection is sometimes acknowledged in principle, but in practice only one

aquifer utilization model by Flemming and (1997), according to the literature reviewed, has

modelled this relationship. As will be seen, this dissertation hiphlights some different,

independent perspectives about the benefits of f o m d l y incorporating the two issues into one

problem. Second, the study wiil examine what effect differences in benefit and cost functions

of groundwater use are likely to have on the social decision rules for
groundwater. Third, the dissertation wïil examine the effectiveness of this approach for an

ernpincal problem in Ontario. In the process, the study will also provide an economic

evaluation of current institutional arrangements for groundwater use.

1.6 Organization of Dissertation

The dissertation is organized as follows. Chapter 2 examines the current groundwater

management approach in Ontario and formulates an economic argument for an alternative

integrated approach. This is done by carefuiiy examining institutional arrangements and

economic arguments in the literature on groundwater quality and quantity management.

The analyticd model of an integrated groundwater management approach is

developed in Chapter 3. Three distinct users of groundwater are identified (private extractors,

municipal extractors and nonextractive users) and the benefit-maximizing level of activity

by each user is prescribed. This chapter derives the optimal decision niles and discusses their

practical implications.

Chapter 4 uses the mathematical insight gained in Chapter 3 and applies the

integrated model to an empirîcal case in Wilrnot Township in southwestern Ontario. This

part of the study provides empirical estimates of the potential welfare gains associated with

alternative groundwater management approaches.

Chapter 5 examines the policy implications of the results, the primary concems being

the potential benefits of an alternative approach to groundwater management and the cost

of implementing an alternative approach.

Finally, Chapter 6 presents the conclusions of the dissertation and highlights the
contributions of the research. Also, it Iists the limitations and offers some suggestions for

m e r research.
 Chapter 2

The Problem With Groundwater

Management Policy In Ontario

2.1 Introduction

Groundwater management policy requires change when it allows suboptimal

distribution of water among users (Spulber and Sabbaghi, 1994), intertemporal misallocation

of water use (Burt, 1967), and suboptirnal distribution of groundwater pollution activities

(Shortle, 1990,).' Based on these three criteria, research by Campbell et aL(1974),

MacRitchie et al. (1994), and Lintner and Weersink (1998) shows that groundwater

management practices in Ontario will require change in order to ensure the efficient resource

use. Efficient resource use could be ensured if policy rnakers (a) reIied on more effective

groundwater policy instruments, and (b) integrated groundwater quantity management and

quality management. A detailed discussion of policy instruments is outside the scope of the

study so discussion of these instruments is limited.

The purpose of this chapter is to formulate an argument for an integrated approach

to groundwater quality and quantity management to increase groundwater management

efficiency in Ontario. The term integrated groundwater quality and quantity management or

integrated approach is used to convey the impact of changes in groundwater use affecting the

quality or quantity of water on the economic welfare of users.

' Econornic inefficiency exists when it is possible to increase the aggegate value of benefits from a
resource at a lower cost or through a reallocation of the resource. See Boadway and Bruce (1984) and Eatwell
et al- (1987) for more detailed discussion of the concepts of efficiency and inefficiency.
2.1.1 Overview of chapter

The rest of the chapter consists of four main sections, The next section (2.2) provides

a review of the main policy instruments for the control of groundwater extraction and

groundwater pollution in Ontario. Section 2.3 evaluates current groundwater policy based

on economic efficiency criteria In generai, it will show that present trends that include loose

institutional arrangements, ineffective policy coordination, and inefficient policy instruments,

will perpetuate groundwater extemalities associated with pollution and excessive extraction.

Section 2.4 examines the approaches used in the published literature to identify,

rneasure and resolve the extemalities that cause efficiency losses from groundwater use. The

literature f d s within two broad categones: one deals with groundwater extraction problems

and the other deals with groundwater quality problems. The literature shows that

extemalities must be accurately measured if they are to be solved. Published research on the

subject has attempted to measure extraction or pollution externalities separately and never

jointly. Since groundwater quantity and quaiity are interrelated, groundwater use externalities

might be better measured by using an integrated approach.

The final section (Section 2.5) outlines how the integrated approach can be devised

and draws out some policy questions that the proposed new approach might prompt. It may

be that current policy is addressing the nght issues but not in the best way. The section

concludes by suggesting the specific changes in groundwater management policy to

rnaximize efficiency gains fiom the province's groundwater resources.

2.2 Groundwater Management In Ontario

The management of groundwater has evolved through several phases that correspond

with the development of the Ontario. Initially, very little attention was given to the quaiity

of groundwater resources since adequate supplies of uncontaminated surface water existed.

In the fust h d f of this century, legislation afTecting water deait mainly with public health

issues (Estrin and Swaigen, 1993).

By the 1960s, population growth and agricultural intensification had created the need

to protect groundwater. Later, measures addressing groundwater scarcity and various

groundwater quality concems were implemented (e-g., those dealing with industrial waste

disposal, agricultural runo& urban pollution (Karvinen and McAllister, 1994)).

Currently, Ontario's groundwater is managed with a combination of instruments that

include cornmon law, statutes, regulations, public information prograrns and markets. In this

section, the main features of groundwater policy are reviewed. The roles of the federal,

provincial and local governments and their agencies are examined, and the econornic

implications are discussed. To facilitate the discussion, the section will review groundwater

policy under the two broad categories: (i) pollution control policy, and (ii) extraction and

allocation policy.

2.2.1 Pollution Control Policy

2.2.1.1 Federal Legislation

Groundwater management is primarily a provincial responsibility. The 1867 British

North Amenca Act (renarned the Constituted Act in 1981) gives provinces the full authority

over the use, management, and protection of most natural resources that lie within their
borders, including water. The federal govemment retains some influence where issues of

national concem &se, such as, threats to the quality of drinking water, fisheries or

navigation. Despite its limited responsibility, the federal govemment has enacted legislation

that provides protection for groundwater and surface water quality (Estrin and Swaigen,

1993). For example, the Canadian Environmental Protection Act (1988) empowers

Environment Canada and Health and Welfare Canada to prohibit the manufacture, sale and

use of substances that are hazardous to environmental health, except approved substances.

Substances controlied under this Act include polychlorobiphenyls (PCBs),

polybromobiphenyls, polychlorinated terphenyls, mirex and chloroflourocarbons (Reynolds

and Feilding, 1987). This act does not apply where provinces have developed equivalent

standards under their own environmental statutes.

The Fisheries Act of 1868 (amended in 1991) gives added protection against the

release of deletenous substances into water inhabited by fish. Since groundwater provides

base flow for streams, subsurface discharges fiom pulp and paper, petroleum, mining, food

processing, and waste disposai operations could reach waters inhabited by fish. So,

potentidly, al1 of these activities could be partially controlled under the Act. In addition,

through several other federal statutes, including the Pest Control Products Act and the Food

and Drugs Act, the federal govemment can control the use of most pesticides using its

chernical registration and approval system.

2.2.1.2 Provincial Statutes Mecting Groundwater QuaIity

There are two main provincial statutes affecting groundwater in Ontario: the Water

Resources Commission Act (renamed the Ontario Water Resoztrces Act in 1970) and the
Environmental Protection Act. The f m t to be established and probably the most significant,

was the WaterResources Commission Acr of 1956 with its main amendment in 1961- Estrin

and Swaigen (1993) suggest that this act was passed prirnady to strengthen the province's

surface water rights and to fiee the province from legal battles with nparian land ownen over

water quality degradation? However, the Act also gave provincial water managers the

oppominity to bring groundwater under the costrol of Ontario's water authority.

Since being renamed the Ontario Water Resources Act (OWRA) in 1970, the Act has

been revised several times. It places the management of water resources (including

groundwater) under the responsibility of the Ontario Ministry of the Environment, OME.

Under the Act, the OME (specifically, the Minister or hisher appointed Director of Water

Resources) can take a number of actions to protect groundwater quality. These actions may

involve prohibiting the discharge of sewage into water bodies and wells, and seeking judicial

injunctions to stop the discharge of waste that causes groundwater pollution. The OME's

approval must be obtained for the construction and operation of public sewage systems and

individual wells (Wood, 1994).

The Ontario Water Resources Act also requires that persons involved in well

construction obtain licences which demonstrate their cornpetence to drill wells safely, thus

reducing the chances of well contamination from adjacent materials. The OWRA is

accompanied by Regulation 903, which is a set of technical regulations defining protective

Before the passage of the Water Resources Commission Act and its predecessors between 1956
and 1961, several riparian land owners had succeeded in obtaining court injunctions preventing provincially
approved sewage treatrnentoperations fiom discharging partially treated sewage into surface water bodies. The
new statutes gave government the authority to approve and regulate al1 activities affecting water quality thus
removing riparians' nght to stop potentially harrnful activities approved by govemment (Estrin and Swaigen,
1993).
zones around public water sources. Regulation 903 also outlines the requirements for the

mandatory collection and submission of well records and technical specifications for the

constmction of weIls.

Apart from the OWRA, the Environmental Prorection Act (EPA), administered by

OME, prohibits the discharge of certain contaminants into the environment that exceed

regulated levels. With respect to groundwater quality conuol, the act coven the following

provisions:

1. Approval of aii waste management or waste disposal operations and security deposits

for non-municipal operations.

--
11. Certification process for al1 pnvate sewage systerns to venQ that systems are built

to specified ministry standards.

-*-
111. Establishment of liabilities and their limits for unauthorized disposal of pollutants

into surface and groundwater and the right to compensation for affected individuais.

iv. Strict regulation of the closure of waste disposai sites for up to 25 years after

decomrnissioning.

Together, the Ontario Water Resources Act and the Environmental Protection Act give the

OME authority to use ifs approval system to regulate a wide range of activities that include:

water works, wastewater treatment infiltration basins, landfills, waste disposai into deep

wells, spray irrigation, sludge application and disposal, septic tank systems and mine tailings

(Ontario, 1994b).

In addition to the OWRA and the EPA, there are severai other statutes that contribute

to provincial groundwater management policy. For example, under Petroleum Resoiirce Act,
waste from oil production c m be disposed of via deep-weils provided the wells confom to

standards established to prevent pollution. Pemiits issued by the Ministry of Natural

Resources are required for the discharge of mineral water into groundwater recharge areas-

In related legislation, the Garoline Handling Act estabiishes the standards for the installation,

monitoring and inspection of al1 underground storage tanks used in the gasoline industry.

And the Pesticides ACL,administered by the Minisay of Environment, controls d l aspects of

pesticide use, including sale, disposal, transportation, storage and prohibition.

Fhally, the Environmental Bill of Rights of 1994, is one of few pieces of legislation

giving the general public legal standing to sue polluters. It formalizes the public's right to

a healthy environment, the public's right to participate in environmental decisions, and

protects employees who report employers engaged in illegd pollution. Given its wide scope,

the Environmenta[ Bill of Rights is potentially a strong statute for the protection of

groundwater quality.

2.2.1.3 Groundwater Quality Management fiograms of OME

The water resources section of the Ministry of Envira~nrnent uses a Iar

administrative apparatus to manage groundwater. The administrative policies and procedures

of the OME water management tearn are bounded primarily by the O m and the EPA, and

are laid out in the "Blue Book", the rninistry's water management policy manual. According

to this manual, the policy objective for groundwater is to protect the quality of groundwater

for the greatest number of beneficial uses through pollution prevention (Ontario, 1994b).

This policy is implemented primarily through an extensive approval system that exists for

activities that require OME approval under the OWRA or the EPA. Formal approval is given
in Certificates of Approvd, which speciQ on a case by case basis, what activity is permitted

and what water quality requirements must be met (Ontario, 1994~).

The OME administers its approval system based on a principle of "reasonable use7'.

By this principle, the ministry may specify the acceptable levels of pollution from approved

activities but may alIow these levels to be exceeded if it is thought that strict cornpliance

would result in adverse economic or social impacts on groundwater users. The reasonable

use principle is also applied if suitable treatment technolo,~ is unavailable, or if the

provincial water quality objective is thought unattainable (Ontario, 1994a).

While OME is the main administrator of groundwater progams, some measures that

affect groundwater quality are administered by other rninistries, such as, Natural Resources,

Municipal Affairs, Agriculture Food and Rural Affairs, and Consumer and Cornmerciai

Relations. Together with OME, these rninistries contribute to water management through:

the identification and ranking of aquifers vulnerable to pollution.

delineation and protection of sensitive aquifers through municipal land use planning.

public awareness and education regarding the econornic and social importance of

groundwater-

groundwater risk reduction prograrns.

Some curent and potential contributors to groundwater pollution involve activities

that do not require approval under the OWRA and the EPA, e.g., diffuse source activities

(such as crop fertilization, manure application, road deicing), salt storage areas, unlicensed

landfills, and spi11 sites. Sorne activities are regulated under other provincial or federal

statutes. Where unregulated activities cause groundwater pollution, OME may order remediai
activities and replacement of affected water supplies (Ontario, 1994b).

2.2.1.4 Rdes of Municipalities and Conservation Authorities

W U e OME is charged with generai responsibility for groundwater quality,

municipalities hplernent many of the provisions for water quality protection. The Municipal

Act empowers municipalities to construct and operate municipal water and wastewater

treaunent facilities and to enact Iaws to control industrial waste discharges. Municipal bylaws

generally regulate industrial waste such as grease, oil, and other hazardous, inorganic

substances by setting concentration lirnits on discharges to municipal sewers.

Municipalities are also responsible for the application the Planning Act that controls

land use zoning and planning. By controlling land zoning and subdivision, they c m influence

the location of hazardous substances and rates of growth for sub-surface sewage systerns that

threaten groundwater quality.)

Under the Consentution Aurhonries Act, municipalities have the power to request the

establishment of conservation authorities in a given watershed to aid the conservation of

specific nanual resources, including groundwater (Estrin and Swaigen, 1993). Conservation

authorities have extensive control over water quality through the use of bylaws and pennits

administered locally. For exarnple, the Grand River Conservation Authority has been

effective in controliing residential home construction to protect goundwater from domestic

The OME has envisioned more active roles for rnunicipalities in the Municipai-Indusuial S a t e g y
for Abatement (MISA). ïntroduced in 1987, MiSA required that Ontario municipalities agree to establish
enforceable water pollution standards and regdations for themselves and severai industrial sectors. The
program was designeci for vinual elirnination of persistent toxic poIIution from water bodies. However, MISA
has not met originally stated objectives because municipalities have not vigorously enforced pollution standards
for fear that they will slow economic growth in municipalities (Estrin and Swaigen, 1993).
sewage systems emissions and has promoted an ernissions trading program to reduce

phosphorus loading in surface and groundwater bodies (D.W. Draper and Associates Ltd. et

al., 1997 and Estrin and Swaigen, 1993).

2.2.1.5 Speciai Activities

Agriculture is one of the activities not regdated under the Ontario Water Resources

Act and the Environmental Protection Act. In fact, very few statutes relate to groiindwater

pollution from agriculniral activities, and there is one statute that protects agicultural

activities from liability for certain types of environmental nuisance - the Farm Practices

Protection Act. Given the paucity of statutes to regulate agricultural uses, governments,

municipalities and f m groups have used various voluntary activities for agrïcuituraI

pollution abatement, cg., use of voluntary best management practices, buffer strips and

environmental planning.

Environmental planning through the Environmental Farm Plan (EFP) has been one

of the largest groundwater protection efforts. The EFP prograrn was introduced in 1992 as

fmners' voluntary response to 17 environmental issues, most related to groundwater

management? It was established as a collaborative effort of a group of farming organizations

and Agriculture Canada (Segsworth et aL, 1998). Under the EFP prograrn, farmers make an

extensive assessment of theû farming practices and prepare an action plan that indicates how

any environmental problems will be mitigated. Plans are reviewed by a cornmittee of farmers

that may make suggestions for improvement. In exchanp for participating in the EFP

These issues include soi1 management, water wells and water efficiency, disposa1 of f m waste,
Iivestock yards, f m noise and odor, wetlands, woodlands, and the handling and storage of fenilizers,
pesticides, petroleum products.
program, Ontario fanners have received a financial contribution of $1,500 per famtead. The

most recent EFP agreement was due to conclude in 1998.

2.2.2 Groundwater Extraction and Allocation Policy

2.2.2.1 Common Law Influence

Groundwater quantity management involves a combination of cornmon law and

provincial statutes (Ontario, 1994b). The principle comrnon law practice that influences

groundwater allocation in Ontario is the nrle of capture. Under a strict rule of capture. an

occupier of land above an aquifer may extract any amount of groundwater even if the water

level is lowered to the detriment of other groundwater or surface water users (Lucas, 1990

and Tank, 1983): Before the 1961 amendment to the Water Resorwces Commission Act, the

rule of capture applied to groundwater extraction. Groundwater uses that are exempt

provincial water statutes, such as extractions for domestic, livestock fLirrning and firefighting

purposes, continue to obtain groundwater based on a rule of capture (Campbell et al., 1974,

and Lucas, 1990)-

2.2.2.2 Statutory Provisions for Groundwater Quantity Management

The Ontario Water Resources Act (OWRA) is the main provincial statute affecting

groundwater allocation. The Act, requires that groundwater users extracting in excess of

50,000 litres per day obtain a permit to do so. Pre-1961 extractors and persons engaged in

extraction for domestic purposes, livestock watering, or firefighting are exempt. Under the

Where water flows underground in a defined channel or course. the doctrine of riparian rights
applies and not the rule of capture (Percy, 1988). Under riparian rights each land owner sharing a comrnon
body or fiow of water is obliged to use water so rhat the amount is undiminished and the quality of water is
not impaired. However, it is uncornmon to find groundwater flowing in defined channels in Ontario.
OWRA these pemiits can be modified or revoked if water withdrawal causes material h m

to any person, if there is a reduction in the quantity of water available for uses being made

of it, or if extraction causes loss of enjoyment of the normal use of property (Wood, 1994).

In addition, the drilling of wells is subject to a permit process. This permit process

is intended to ensure that wells are spaced adequately to prevent well interference problems.

Technical regulations, such as Regdation 903, outline the requirements for the well

construction, collection and submission of weIl records, and help groundwater managers to

monitor changes in the stock of groundwater.

Other provincial and federal statutes could be ~ s e to

d control groundwater extraction

and allocation. For example, under the Environmental Assesment Act, any proposed publicly

funded development, and some private projects identified by cabinet, can be disapproved by

OME if the required environmentai assessrnent report indicates negative effects of

development on the availabiiity of groundwater or other environmental assets. Similady, the

federal Fisherïes Act can be invoked to regulate groundwater extraction where natural

groundwater discharge is reduced by extractions (Reynolds and Fielding, 1987).

2.2.2.3 Groundwater Quantity Management Prograrns of OME

The OME is responsible for adrninistering "permits to take water" and well pemiits.

Applications for pennits to take water are evaluated using criteria established under the

Ontario Water Resources Act. Permits to take water for indusuial, commercial and irrigation

purposes are regulated according to the availability of resource, the technical efficiency or
economy of use, and the seniority6 of use in an area (Ontario, 1994b). Generally, use of

water for recreational and naturd habitat protection are considered to be of lower pnority

than domestic and municipal uses.

Pennïtted users of groundwater have clearly defined pnvileges and responsibilities.

Permitted users whose extractions interfere with the supplies of OWRA exempt users and

senior permitted users are required to reduce extractions to eliminate the interference.

However, each permitted user is protected from interference caused by subsequently

approved extractions. Pemiitted users are not protected from interference by exempt users.

2.2.2.4 Municipal Role in Quantity Management

The role assigned by provincial statutes to municipalities in water quantity

management involves distrïbuting potable water and managing wastewater. Municipalities

obtain groundwater extraction permits from the OME and distribute water to individuai

consumes or to local water suppliers. Water may be obtained from surface or ground sources

or both-

In the p s t , municipalities' pnmary concem was to distribute water and provide

wastewater services to as many people as possible. To assist this process, special financial

assistance from the province was offered to help cover the capital costs involved (Campbell

et al., 1974). Operating expenses were covered in part by user fees applied by municipalities

and govemmental transfers. In addition to subsidizing capital costs, the federal and

provincial goveniments covered a part of the operating expenses by means of budgetary

Seniority refers to the length of access to groundwater. OME gives priority to more senior usen in
resolving conflicts involving permïts to take water.
transfers to municipalities (McNeiU and Tate, 1991). User fees have been based on fixed

rates, area charges or volumetric rates, and are collected in property tax payrnents, or through

itemized water bills-

More recently, the reduction in funding fiom provincial and federal governments has

necessitated cost reduction and conservation efforts by municipalities. Municipdities have

focussed their attention of demand management7 to help Lower the cost of supplying and

treating wastewater (Loudon, 1994). These efforts rnay include full cost recovery pricing for

water, water conservation education prograrns and various technicd efficiency programs.

2.3 A Critique of Groundwater Management in Ontario

Ontario's groundwater management policy involves an extensive program of

regdatory instruments. New economic instruments, such as volumetric pncing for water and

cost share prograrns signai a departure from the sole dependence on regulaiory tools. Other

economic instruments such as emissions taxes, abatement subsidies, and tradeable permit

systems are being considered but have not yet been implemented (D.W. Draper and

Associated Ltd et al, 1997). This section makes the argument that the most important

instruments (extraction pennits and certificates of approval) are unsuitable from an economic

view point because they do not ensure efficient resource distribution between groundwater

users, they present weak incentives for conservation of quantity, and they perpetuate

Dernand management is the practice of controllhg the econornic. technological arid social variables
affecting the dernand for water to reduce water use. See Tate (1984) for a brief discussion of the subject. While
charges for groundwater withdrawals may be one form of demand management, there are no clear provisions
for such charges in Ontario's statutes.
inefficient distribution of pollution abatement activities where they rnay occur.

2.3.1 Groundwater Allocation

The first inefficiency that may be associated with groundwater use is an allocation

inefficiency. When water used in some activities could generate greater economic value in

other activities and there is no rnechanism to accommodate the reallocation, it can be said

that an inefficiency in allocation exists (Hierschleifer et al., 1969). The Ministry of

Environment is sometimes faced with the decision of whether to issue a water takIng pennit

for a new industrial or commercial use as opposed to reserving it for municipal use. Often

the decision is based on which party first requested the permit, with no reference to the

economic value of groundwater in the contending usesS8During period of drought the

conflict is about whose permitted use should fxst be rationed. Again this issue is not

determined with eficiency criteria, but with poiicy guidelines that rank various uses of water.

Under the current system, water rationing problems begin with the filing of well

interference cornplaints about pumping externalities created by neighbouring wells, As the

term externality is essential to the rest of the chapter, its meaning in the context of Ontario's

groundwater management problem is explained before proceeding. An externality exists

whenever one individuai's actions physically affect the utility of another, with no accounting

for these actions in his/her decision making.

IF institutional arrangements permitted. prices and royalties would help to ensure that the resources
are put to the highest valued uses but no such charges are applied to Ontario's groundwater resources. There
are times when permitted uses of water rnay even be revoked by OME because permit hoiders have not put the
water to a visible use (Warbick, personal communication, 1998).

Externalities have been assigned to various categories (Book with Cowen(l9xx).

Consider the following brief explmation of economic inefficiencies associated with

groundwater extraction. For any distribution of weils, the water table wilI be influenced by

cones of depressiodOof various sizes. If one cone depresses the water table to such an extent

that vertical lift over which water must be drawn is increased in a neighbouring well, that

neighbouring well experiences apumping cost e x t e m a l e . That is, it will cost more for the

affected weii to pump the same quantity of water over a greater vertical lift, or it will cost the

extractor more to deepen the weli (Ailey and Schafter, 1987).

Pumping cost extemalities may occur over an aquifer that is expenencing a surplus

or a deficit water balance. A surplus groundwater bdance condition exists where the net

natural recharge or percolating water from precipitation and surface bodies less water

flowing naturally from the aquifer exceeds total extraction. A deficit refers to the converse.

Figure 2.1 illustrates the extemal effects of purnping under surplus and deficit conditions.

Given three wells, A, B and C, distributed in the manner depicted in Figure 2.1, a pumping

extemality in a surplus condition c m is created if well B with a high rate of extraction creates

a deep and wide cone of depression that interferes with pumping in well C. The financial

impact is felt by the owner of well C. Since the overall water table level is unaffected, well

A is not affected by well B.

In a deficit condition, extraction exceeds recharge and this reduces the total arnount

of groundwater. Consequently the water table is lowered in al1 wells, not only in wells

influenced by cones of depression. The reduced water table is not an extemdity by itself. B

Io A cone o f depression is an inverted cone-shaped cavity in the water table that develops around a
well. Its width and depth are determined by the rate of extraction in the well and the rock material type
(Driscoll, 1986).
Figure 2.1 Extemal Effects of Groundwater Withdrawal
Under SurpIus and Deficit Conditions

Surptus Condition: Net natural recharge equals or exceeds total groundwater

extraction. The level of extraction in well B makes it more expensive to extract
fiorn well C.
Well C
Well A

Deficit Condition: Net natural recharge is less than total groundwater extraction.
Wells A and B contribute to eficiency losses by exteracting until water table
reaches the lower level. Under suitable incentives, they would lower the water table
to the optimal level. Notice that at the optimal water table level, well C can operate
only if the well shaft is lengthened-
We
Well A
WelIB 1

Increased vertical lift due to \

\

sub-optimal extraction Water table under sub-

optimal withdrawal.
is one only if the costs associated with the reduction are not explicitly considered by each

user in their extraction decisions. As extraction exceeds the efficient amount, the effect of

the extraction externality is a deepening of the aquifer (depicted in the Iower panel of figure

2.1). Since both wells A and B contribute to lowering the water below the optimal level, they

create mutuai pumping cost externalities on each other.

Pumping extemalities that are not mutudly and equally offsetting indicate an

inefficient alIocation of resources because the costs well B imposes on weli A are not the

same costs that A imposes on B." This will cause A to cut back operation more than B. In

contrast, if each well was assigned the cost of its externalities, output of wells A and B would

be quite different, depending on the actual size of the externality.

The withdrawal of groundwater from the aquifer in a deficit situation does not only

increase extraction costs, it also reduces the stock of water available for use by other users

in the future. In effect, current extractors create a stock extenzality by lowering the social

value of groundwater for future generations (Provencher and Burt, 1993).

With the exemptions provided by the OWRA, extractive users of water in domestic,

livestock watenng, firefighting, and pre-196 1 activities can withdraw an unlimited quantity

of groundwater, subject only to the aquifer's capacity. This exemption policy conveys the

message to exempt users that use of groundwater resources is costless. In reality, unrestricted

access to groundwater - rule of capture - initiates a comrnon pool resource problem and the

externalities associated with it. (This was discussed in chapter 1, section 1.2). Thus, no

'' If both parties would truthfully report the effect of extractions on hisher costs, they could both
negotiate a contract. However, obtaining information about each other's extraction would be unlikely since
each extractor could gain by under-reporting his/her extractions.
strong incentive for conservation is passed o d 2

The system of water taking permits, which can be descnbed as a system of

nontransferable quotas with different pnonty weights, provides more incentive for

conservation than a d e of capture. Nevertheless, the permit system is does not necessarïly

encourage inefficiency because of the manner in which extemaiities are dealt with and

because it does not d o w water resources to flow to the rnost productive uses.

First, the permit system does not efficiently manage the external costs of groundwater

extraction. The administration system for water permits ensures the internalization of

extemal costs only in well interference cases (discussed in section 2.3.1). For example, the

systern requires the extractor causing the well interference (usually a large scale perrnitted

extractor such as a municipality or industrialist) to reduce extraction or provide an alternative

source of water to the affected extractor who can no longer access water (Ontario 1994b).

However, if the affected party is a permitted extractor with less seniority then the interfering

extractor, no compensation is required. This implies insecurity of t e n u e for water to which

the junior extractor may attach no incentive for conservation.

Further, under OME policy guidelines, a less senior permitted user, such as a

municipal supplier that is accorded high priority, may be freed from the responsibility of

covering external costs if it interferes with a more senior exuactor with a lower priority

weight such as an industrial extractor. This policy creates insecunty and uncertainty about

access to groundwater resources, which helps to weaken stewardship over groundwater

' It is unclear if the exemption of residential and agicultural uses is a major source of inefficiency,
given the arnount of their extractions and their popdation. This is examined empirically in Chapter 4.
resources (Campbell et aL, 1974 and Percy, 1988).

Second, the current permit systern does not povide information about who causes

extraction externalities and what amount of conservation they should take. The resulting lack

of information and control hastens the depletion of groundwater stocks. Water permit

managers of OME can revise the maximum pemiitted use but they would not likely know

if the aggregate level of groundwater extraction exceeds the optimum until marginal

economic factors are considered. To overcome this Iack of information, OME water

managers rnay set the aggregate pemGt!ed extractions not to exceed the estimated net natural

recharge so that the water table will not be lowered. As is shown in section 2.4, even this

"play it safe" approach is not optimal in economic te- because safe yield may deny further

groundwater use when extraction is beneficial.

The third problem with the current permit system is its weak capacity for allocation

efficiency in water use (Campbell et al.. 1974).Permits give some uses ( e g , municipalities)

pnority over others (such as, industrial and irrigation users). AU users are issued upper limits

on permitted extractions. Extractors may not transfer their rights to extract water to other

users. Thus, as groundwater scarcity increases and as hipher valued uses for groundwater

emerge, resources cannot freely flow fiom low to high valued uses. One solution would be

to allow transfer of tides to permits.

One example of inefficient groundwater allocation is priority of access offered to

livestock producers over irrigation f m e r s . The latter are constrained by the terrns of their

pemiits and may be required to reduce extractions in times of drought; no such control exists

for Iivestock producers. ConsequentIy, in times of scarcity, the marginal contribution of

water to livestock famiuig is likely to be much lower than the marginal contribution of water

to irrigation agriculture. And even if the OME had the power to reallocate the resource, it

would not have the econornic information to do so efficiently because current institutions

governing groundwater use were not designed to extract econornic information. Thus, oniy

through administrative genius or serendipity will the permit system achieve an economicalIy

efficient distribution of groundwater among pemiitted users.

In summary, increasing residential and livestock development over an aquifer could

hasten the premature overexploitation of groundwater resources in Ontario because these

users have insufficient econornic incentives to conserve groundwater. Also, the system of

pemiits does not give the appropriate incentives to permitted groundwater extractors. Apart

from a onetirne minimal administrative fee, permitted users are allowed to extract water up

to the pennitted rate indefinitely at no extra cost. The OME has the power to change the

terms of any permit, but such changes are of minimal importance without economic

information to inform policy making.

2.3.2 Groundwater PolIution

The quality of groundwater resources is important because groundwater is the source

for almost one quarter of the potable water used in the province, and is a partial source for

one half the municipalities that supply water. In response to increasing threats of

contamination frorn various waste disposal and livestock operations, municipal water

suppliers have intensified efforts to protect municipal water sources through stricter land use

planning, statutory restrictions, and alternative waste disposal mesures (MacRitchie et al.,
1994). Only recently have measures addressing diffuse source pollution from agricultural

activities emerged (cg., Tarraqua Investigations Ltd., 1995). What is missing is a mechanism

to decide whether pollution abatement activities frorn cultivation activities should be

undertaken, and to what extent.

Two considerations motivate this need. First, groundwater quality protection has

been accomplished mainiy through land use zoning, local govemment waste handling

bylaws, educational and information programs and pollution abatement subsidies to control

pollution from agricultural activities. Zoning bylaws and ordinances may be enacted to help

reduce or eliminate activities that threaten recharge areas (areas from which wells draw

water). Agicultural practices deemed to be of a high risk may be excluded from groundwater

recharge zones or may be perrnitted subject to special precautionary measures (e-g.. CTG

1996). In other cases, provincial and municipal governments have embarked on public

education programs to inform the agricultural community of the private and social benefits

of safe agricultural practices (e.g., RMW, 1996b).

The problem with the above groundwater pollution policy measures in Ontario is that

they do not hlly account for the benefit and cost implications of regulated activities. On one

hand, groundwater qudity contamination affects its desirability as a source of potable water.

On the other hand, the protection of groundwater quality may involve greater costs of

agricultural and industrial production. If new regulatory policies are to be adopted to protect

groundwater quality, the important economic issue should be "What level of protection is

desirable and what benefits and costs are created in the process?" For the efficient outcome,

a program to improve water quality should be expanded as long as its marginal benefit
exceeds its marginal cost (Gibbons, 1986). Under current policy, groundwater managers have

few rnechanisms for transfemng information about the economic benefits and costs of

regdatory mesures to the decision process. Consequenùy, water qudity management OCCLUS

independent of specific economic goals.

Closing the information gap is critical because doing so will help groundwater

managers to make informed economic decisions. The mere presence of an approval system

for waste disposal will not ensure groundwater protection at an efficient level. For example,

despite the "certificate of approval" system adrninistered by OME, industrial wastes and

landfd sites have contaminated drinking water supplies in Elmira, Kitchener, Aurora, North

Bay, Woolwich Region, and Sarnia (MacRitchie et ai., 1994).13These pollution activities

rnay have been justifiable on econornic grounds, but information about their economic value

was not available. An efficient outcome, under a permits and approvals system, is not

ensured.

The second area of concern about Ontario's groundwater poUution policy is that there

may be an ineffrcient distribution abatement activities between polluters, Determining the

aggregate level of pollution abatement activities is one issue; determining how these

activities will be distributed is another. Non-extractive uses of an aquifer do not al1 affect

water qudity to the same degree. External effects from agricultural and other activities are

determined by specific type of activity (Hopkins et ai., 1996), farm management choice

(Yidoe, 1997), and spatial location (Huang et aL, 1996). The analysis of provincial water

l3 The author does not equate contamination form nomial unavoidable activities (e-g., crop cultivation)
with accidental contamination that is generally avoidable (e.g., indusuial accidents). Groundwater
contamination from accidental activities is outside the scope o f this study.
quality policy shows that there is no mechanism in place to ensure that benefits and costs of

uses are based on social rather than private accounting.

In summary, groundwater pollution policy in Ontario cannot be defended using any

test of economic analysis. Water quality protection activities are based on bureaucratic

projections about the quantity of potable water that is required. They emphasize the

extractive uses of water while not balancinp them against the economic benefits lost by non-

extractive users of groundwater. Also, current poficy does not ensure cost efficient

abatement activities. The costliness of current management practices must be evaluated to

deterrnine if changes are necessary.

2.4 Internalizing Groundwater Externaiities: A Brief Review

Excessive rates of groundwater extraction and groundwater pollution indicate the

existence of extemal costs that are not accounted for in the private decisions of groundwater

users (Brown and Deacon, 1972,Negri, 1989, and Provencher and Burt, 1993).The previous

section shows the extent of these issues in Ontario. Because efficient outcomes are not

achievable when extemalities persist, an approach for bringing extemal costs into private

decision making must be devised. This section briefly reviews and evaluates some of the

main approaches proposed in the water resource literature. A part of the literature focusses

on removing the obstacle of ill-defined property rights and letting free market exchanges

deterrnine the efficient levels of groundwater use over time (e-g., Gisser, 1983). Another part

of the literature concentrates on designing management strategies for a central groundwater

manager acting as a social planer (e-g., Feinerrnan and Knapp, 1983). Some approaches
highlight the problem ofexcessive extraction, while others are concerned with the problem

of groundwater poilution. It is not beneficial to review the literature in detail. Instead,

published works will be divided into two broad categones: groundwater extraction rnodels

and groundwater quality models. In each case, the researcher's central econornic problem and

the proposed solution are reviewed and evaiuated.

2.4.1 Groundwater Extraction ModeIs

One pnmary cause of in ineficiency in groundwater extraction occurs because of ill-

defined property rights which cause externalities to persist (Anderson et al., 1983 and

Demsetz, 1967). When individual land owners exploit a common pool resource such as an

aquifer, cornpetition and the resulting extemalities are inevitable. Each individual's clairn

on groundwater is unrestricted but uncertain. This arrangement, referred to as the rzde of

caprzrre" gives several extractors rights to the same groundwater resource, e.g., exempt users

section 2.2.2.1. Extractors pursue their self-interest without considering the extemal costs

visited on third parties in the process, Consequently, little incentive is created for

groundwater conservation, for what is conserved by one individud can be extracted by

another (Brown and McGuire, 1967, Ciriacy-Wantrup and Bishop, 1975). Therefore, early

groundwater extraction models were designed to solve the problem of over pumping and

mainly suggested safe yield approaches, Le., pumping no more than the recharge rate.

l4 For practical purposes, extracton who are exempt from the regulations of the Otrrnrio Worer
Resortrces Act operate under a mIe o f capture (Campbell et al., 1974). The extractions of permitted users are
lirnited by the t e m of their permits and available resource stock but claims to groundwater are not protected
from the cornmon pool problem of inadequate incentives for consewation.
 Burt (1964 and 1967) presented research, now regarded as the seminal works in

groundwater econornics. He presented the water manager's problem as follows:

Should water be used very rapidly to give immediate production in large

quantities; should o d y safe yield or rate of recharge be used and initial stock
Ieft perpetually, or is optimal rate of use a compromise between extremes?
(Burt,1967 p. 45)

He modelled groundwater with a declining marginal net benefit at any given time and

assumed that groundwater stock had a positive effect on future net marginal benefit of

extraction. This positive effect carne mainly from the savings in energy cost to pump water

over a shoaer vertical lifi, and from the reduced production risk when the water table is

higher. Using a dynamic programming model, Burt showed that the optimal policy for the

inter-temporal allocation of groundwater should balance the benefits of immediate use

against the diminishing vaiue of water at any time, the increasing pumping costs associated

with a fdling water table, and the insurance value of stocks against uncertainty.

Burt used the analytical results to suggest how the optimal policy would be affected
by changes in output price, pumping technology. interest rate, and input prices. He assumed

that the aquifer was very large in relation to rate of use, and consequently, did not consider

the possibility that the aquifer could be depleted.ls Therefore, the main extemal cost

considered by Burt was the eKect of current groundwater extraction on future pumping cost.

A later model by Brown and Deacon (1972), taking a different approach from that

IS This assurnption is significant because it rules out the likelihood that the aquifer could run dry if
.traction exceeds recharge. Under these circurnstances, the critical factor affecting decisions is the change
pumping cost, As pumping cost increases with a declining water table. extractors wilI eventually find it no
longer feasibIe to extract the groundwater that is present. Further, where extractions are srna11 relative to the
capacity of the aquifer, changes in pumping cos&over tirne would be smdl, and the extemal costs from over-
pumping would be insignificant (Feinerman and Knapp, 1983).
by Burt (1967), established a similar decision rule for the optimal utilization of an aquifer.

In a basic forrn, the the optimal d e States that the net marginal benefit of using a unit of

groundwater is equal to its marginal social cost, which is divided into two components. The

fîst component is the marginal private cost of extraction. The second, is the present value

of increased pumping costs resulting from decreased groundwater stocks.

By estimating the present value of extemal pumping costs, Brown and Deacon were

estimating the size of the extemality associated with unregdated groundwater extraction. In

the absence of replation this cost would be ignored by extractors, but a groundwater

pumping tax of the size of the externality would intemalize the extemal costs and bring about

the optimal level of extraction.

An alternative approach proposed by Moncur and Pollock (1988) ornitted the issue

of the pumping cost externality that was the subject of earlier research and focussed attention

on eliminating the stock extemality (defined in section 2.3.1.1). By doing so they allow for

the possibility that the aquifer could become depleted. The presence of a stock externality

would indicate that the resource is being depleted too rapidly. Therefore, they estimated a

scarcity rent for groundwater, which when added to the costs of extraction, treatrnent and

conveyance, would result in a price for groundwater that would ensure the efficient rate of

use? Thus the scarcity rent would intemalize the stock extemality.

Moncur and Pollock (1988) proposed the following procedure for estimating the

scarcity rent. Given an aquifer that is potentially exhaustible, they established a time by

l6 Scarcizy renf is defined by Moncur and Pollock (1988 p. 62) as that portion of the resource price.
in excess of extraction, treatrnent and conveyance cost, that signals scarcity and defines the value of the
resource in situ.
which (at current rate of use) the source of water must be replaced at a higher cost. They

treated scarcity rent as the decrease in the present value of future costs that would result from

delaying the introduction of a more costly alternative supply. A charge for groundwater that

included aU costs of acquisition, treatment and distribution as well as scarcity rent would be

the efficient pnce and would maximize the benefits of water from the aquifer."

2.4.1.2 Groundwater and Private Property

One issue not addressed by the Burt (1964 and 1967) papers was how the optimal

policy would be achieved and maintained. Brown and McGuire (1967) and Brown and

Deacon (1972) provided an explicit approach. A pncing mechanism that captured al1 of the

external costs associated with pnvate decision making would be designed by a central

groundwater control agency. But Gisser (1983) argued that the interesting economic problem

in groundwater use should not be whether o r not there is central control but whether there

is a set of clearly defined, enforceable and transferable property rights for groundwater.

Gisser (1983) contended that Pareto-optimal solutions suggested by optimization

models are not necessady practical if there i s no mechanism for determining the aggregate

level of groundwater rights (i-e., how much water is extracted and who uses it). Thus, even

the control agency must have hlly enforceable and transferable property rights to allocate

groundwater efficiently. Therefore, what is of pnmary importance is findins the institutional

arrangement that will allow incumbent owners to trade property rights with potential users

l7 There are several objections to the approach proposed by Moncur and Pollock (cg.. Lynne. 1989).
However, its rnost serious shortcoming seerns to be ifs inabiIity to address the question of pumping externality
that appears so critical to the groundwater problem The Moncur and PoHock may theriifore, be more applicable
to surface water problems.
until the efficient outcome is achieved.

To support his reasoning, Gisser (1983) used his earlier work done with Sanchez

(Gisser and Sanchez, 1980), to show that when property rights for water are clearly defined,

and when the size of the aquifer is large relative to the size of extraction (see footnote #15),

the net economic benefits from an aquifer used by individuals pursuing their self-interests

would approximate the optimal welfare outcome. This would be so because the inter-

temporal misallocation of extractions wouId produce insipificant welfare losses. However,

Gisser (1983) acknowledges that this surprising result cannot be generalized because it

emerges from the initial assurnption about the ratio of extraction to aquifer size.

Where the amount of extraction is significant relative to the capacity of the aquifer,

the pumping externality in a private property solution cannot be ignored (Feineman and

Knapp, 1983). Individuals having c1earIy defined property rights for groundwater stocks

would elirninate the stock extemality but could experïence increased costs of extraction if

they chose to delay extraction while others were pumping groundwater. Consequently,

Anderson et al.(1983) suggest that the privatization solution of the groundwater extraction

probfem be designed to prevent owners of groundwater stocks from mshing to extract their

stocks too soon.18

From the literature, it is clear that unambiguous property rights are important for the

solution of the extemality problem. Whether it is better that these rights be issued to a state

control agency than to pnvate individuals, is a matter that will not be addressed in this

l8 Concern about this "rush" for the resource is valid only when there are sevenl private ownen of
groundwater stocks. If there is only one owner, the property rights system wiI1 yield the s m e result as an
idealized central control agency solution since al1 extemal pumping costs would be internalized.
dissertation. Several arguments for and against state control of water resources are presented

in Young (1986). SaIibia, (1987) and Anderson et al. (1983). In this dissertation it is accepted

that groundwater resources in Ontario and most other provinces are state property, over

which a centra. agency has authority (Thompson, 1987).19 Consequently, some researchers

believe that central control (regional or local) is likely be the pattern of management for a

long time, though the nature of control might entai1 some amount of decentralized decision

making (Scott and Coustalin, 1995 and Andrews and Fairfax, 1984).

In the past two decades, several -dies have attempted to quantify the potential

welfare and distributional effects of different management approaches for groundwater

extraction (e.g., Feinerman and Knapp, 1983, Provencher and Burt, 1994, Woahington et al.,

1985. and Zapata, 1988). In general, these studies show that a central groundwater manager,

using a dynamic optirnization process, wouid increase the net benefits from groundwater use

compared to groundwater use under a rule of capture. Feinerman and Knapp (1983) reported

up to 14% increase in the net present value of extractive benefits of groundwater from

optimal control. However, benefits are quite sensitive to water demand schedule, pumping

cost function, interest rate, and hydrological parameters (such as size of aquifer, storage

capacity of rock material, recharge rate). The distribution of benefits is influenced largely by

the choice of management instrument, such as water tax or quota,

l9 There is no consensus on the issue of "ownership" of water resources by Canadian provinces.

Given the wide ranging provincial powers to manage, permit, and exclude use of water resources, Thompson
(1987) conciudes that the provinces own water resources where there are no confiicts with native rights. This
provincial ownership does not address the property status of permits issued by the province. Lucas (1990)
notes that the permits issued to groundwater users are neither contractual rights and property rights because
water statutes are not specifically framed to provide for real property grants, which results in insecurity
of tenure. In addition, he questions whether provinces actually own water resources and suggests that "a clear
legislative definition of water rights as propeny rights may be required".
 The major findings of the groundwater extraction Iiterature can be sumrnarized as

follows. At the margin, groundwater should be extracted if the benefit of extraction exceeds

the full private and extemal cost of extraction. Extemal costs considered should include

pumping cost extemality and stock extemality. The discounted value of resource use in any

time period is the critical factor that determines whether an aquifer should be drawn down

or exploited at safe yield. Thus, the literature suggests this optimal, inter-temporaIly balanced

approach to groundwater use. A less than optimal rate of use would be inefficient.

To solve the extemality problem, clearly defined, enforceable and transferable

property nghts must be established for the aquifer. This thesis will later suggest that once

these rights are established, some arnount of central control and private decision making

couid be combined to ensure that the water resource is used at the tirne and in the activity

where it is rnost economically beneficial.

2.4.2 Groundwater Quality Models

While some researchers have been concerned with the problem of how the stock of

water in an aquifer should be extracted, others have been inquiring about how the quality of

water stock c m be maintained or improved (Abler and Shortle, 1991, Fleming and Adams,

1997, Giraldez and Fox, 1995 Krarner et al., 1984, Lintner and Weersink, 1998, O'Neil and

Raucher, 1990, USEPA, 1996, and Young and Congdon, 1994). This section provides a bt-ief

review of relevant portions of this literature.

Groundwater quality is affected by concentrated sources of pollution and diffuse

sources of Concentrated sources include pollution that c m be traced and

controued fiom a f i t e number of points, such as exhaust pipes of industries. Diffuse sources

of pollution have a very large number of points from which poilutants are released, e-g.,

agric~lturalfields. While both types of pollution are important, it is the d i f i s e sources that

have proven the most difficult to control @raden and Lovejoy, 1990 and Cherry, 1987).

The occurrence of diffuse source pollution of groundwater is not readily traceable to

its source since it is ofien produced by many agents and is not easily traced below the ground.

ConsequentIy, individual responsibility for contamination of water supplies by this type of

pollution can be easily evaded, which creates external costs of supplying potable water

among extractive uses of groundwater. The general policy prescription for groundwater

qudity protection and improvement is to implement a water quality protection plan that

balances the benefits and costs of water quality improvernent at the margin (Baumol and

Oates, 1988). Sometimes the benefit and cost functions of the water quality protection

program are not known and it may be necessary to establish an environmental objective and

to achieve it at least cost. Some studies that address this problem empincally include Fox

et al. (1995). Giraldez and Fox (1995), Huang et al-(1996) and Larson et al., ( l996), Lintner

and Weersink (1998), and O' Neil and Raucher (1990).

A substantial proportion of groundwater quality studies deal with the issue of the

efficiency and effectiveness of different policy measures (legal and economic) in meeting

@en quality objectives. For example, Lintner and Weersink (1998) used a profit

" Concentrated and diffuse sources of pollution are sometimes referred to as point and non-point
sources of pollution, respectively.
maximization model of an Ontario wateshed to evaluate policy instruments for controlling

pollution from nitrogen and phosphorus simultaneously.

Hopkins et al. (1996) considered three policy options (emissions standards, input

taxes and effluent tartes) and compared the economic performance of these three options on

two different sites to d e t e d n e if the level of success in controlling nitrogen pollution varies

by site. They also showed that the success a policy varies by f a type and type of tillage.

Their results suggest that taxes can be effective in controlling groundwater quality. However,

these taxes should be targeted based on farrn type and type of tillage.

One approach by Fleming and Adams (1997) recognizes that high extractions could

reduce the aquifer's size, thereby increasing contaminant concentrations. By modelling this

consideration, a quantity-quality approach was taken. However, Fleming and Adams

followed the traditional approach of maximizing the benefits of extractive uses, while not

endogenously accounting for non-extractive uses. Consequently, this dissertation groups their

model as a non-integrated model since it does not balance the marginal econornic benefits

of extractive and non-extractive uses. In addition, Fleming and Adams (1997) did not

consider the fate of pollutants in the aquifer over tirne, apmt from the dilutinglconcentrating

influence of the aquifer's volume.

2.4.3 The Missing Links

In general, water quality models propose pollution reduction prograrns to lower the

cost of supplying dnnking water. By concentrating solely on supplying drinking water,

researchers attach d l econornic importance of the aquifer to its extractive uses. But clearly
an aquifer provides beneficial services other than that of supplying water.

Bergstrom et al., (1996 p. 283) indicate that an aquifer provides a number of

beneficial services apart from the extractive use of water. Among them are (i) provision of

geothermd power, (ii) provision of soi1 support system to prevent land subsidence (iii)

support of Living organisrns in ecosystems and (iv) provision of a medium for wastes of

human economic activity. These services affect the physical properties of groundwater quite

differentiy. Some reduce the physicai quantity available, some affect groundwater quality,

and others have practically no effect on groundwater. Given this variety of benefits,

Bergstrom et al., argue that the full range of environmental and economic services of

groundwater needs to be accounted for in policy decisions.

Accounting for the full range of environmental and economic services of groundwater

involves appreciating the benefits and costs of extractive and non-extractive uses of

groundwater. It would also involve understanding the interrelated nature of extraction and

pollution activities. The missing link in the groundwater economics literature cited is that

there is no study that sets out how extractive and non-extractive benefits of groundwater use

should be pulled together. Neither is there any study that draws a clear picture of the

interrelationships between groundwater pollution and extraction activities. These are needed

areas of expansion for the groundwater literature.

2.5 Integrating Quality and Quantity in Groundwater Policy

The two main areas of groundwater policy in Ontario focus on ameliorating external

effects of extractive and nonextractive use. The previous section presented some approaches
used to address this issue in the past. This final section concludes the case being presented

in favour of integrating groundwater policy initiates and suggests one way in which this

integration cm be accomplished.

25.1 The Reason For An Alternative Approach

The literature reviewed in section 2.4 shows that the first necessary condition for

improved groundwater management efficiency is the establishment of clearly defined,

enforceable, and uansfenable property rights. This snidy accepts that these rights have been

conferred on the provincial govemment by the constitution and is administered by the

director of water resources for OME. (See Percy, 1988, for a detailed discussion of this

issue).21However, as Lucas (1990) has shown, the permits issued by the director of water

resources do not transfer ownership of water itself?

The second necessary condition for improved efficiency, which is stated in section

2.3, is that extraction and pollution extemafities rnust be intemalized. But what if one

externality seems more urgently in need of correction than an other? Should only one be

addressed? And what is the benefit from studying both extemaiities within a single integrated

problem?

Consider the following. Pollution and extraction externalities exist in an aquifer. If

' State ownership dws not necessarily solve the externality problem. The fact that the Ontario
government has legaI responsibility for groundwater management does not ensure that it wilt manage these
resources efficientiy. The cost of government intervention could exceed the benefits, thus creating a nonmarket
failure (WoIf, 1979).

" Some authon suggest that the establishment of enforceable and transferrable property rights in
private han& is a sufficient condition for solving cornmon pool resources problerns and that a central resource
manager is unnecessary (e.g., Anderson and Leal, 1991 and Bnibaker, 1995). However, this debate is outside
of the scope of the dissertation.
the director of water resources assumes that a pollution externality caused by nitrogen use

in agriculture is most urgently in need of intemalization, and deals only with the pollution

problern, a net econornic welfare loss could result. The improvement of groundwater quality

would reduce the cost of supplying potable water which, in the absence an effective demand

management prograrn, would increase the quantity of water extracted. However, increased

groundwater extraction would create or exacerbate a groundwater extraction inefficiency

loss. Also, the pollution reduction program would reduce the net agriculniral benefits of

farmers that incur the cost of pollution abatement. The net result of water quality

improvernent policy would be the increase in current extraction benefits less the loss in

agricultural profitability, less the efficiency loss caused by the increased füture purnping cost

due to increased current groundwater pumping.

Let the present value of increases extractive benefits be denoted by an arnount. K.

The present value of loss in agricultural profxtability resulting from undertaking abatement

activities is defined as F, and the present value of efficiency loss caused by the increased

future pumping in the current period is H. F e value of H could be zero.] The net result of

a water quality improvement program would be K - F - H. This result demonstrates that

water quality management has implications for water quantity management. By omitting the

increase in future pumping cost, a water quality prograrn based only on savings in water

treatment cost less compliance cost would over-estimate economic returns by H.

Conveaely, suppose that a policy is implemented to reduce the eficiency loss

resulting from groundwater over-pumping without a concurrent no groundwater pollution

program. Assume that this is a demand management policy that reduces extractions and
generates savings in the cost of pumping groundwater in the funire. The reduced quantity of

water used wodd lower the cost of supplying potable water in the current period. The net

result would be the present value of savings in future pumping cost (denoted B) plus the

present value of reduced cost of treating a smaller quantity of water (denoted E). Altogether,

the gain from the policy is B + E. Notice that a policy decision based solely on the savings

in pumping cost would underestimate the gain by amount E?

The foregoing discussion shows the integrated nature of groundwater quality and

quantity management. By removing the distinction between the two aspects, a groundwater

management agency would gain valuable information for more beneficial policy decisions.

Groundwater quantity controls may have cost-reducing effects on groundwater treaunent, but

groundwater quality improvement might have cost-increasing effects on water extraction.

2.5.1.1 Implementation Costs

Based on the above illustration, if both policies are implemented, the gross gain

would be the sum of al1 policy gains and losses (K - H +B + E - F). The actual size of the
gross gain is a matter of empirical estimation. The net result of both quality and quantity

policies should be positive if extraction and pollution extemalities exist. One important issue

is whether the equation K - H +B + E - F yields a net gain that exceeds the implementation
costs associated with achieving this result.

Smith and Tomasi (1995) discuss the feasibility of changes in water management

Examples of both types of studies include Provencher and Bun (1993) and Feinerman and Knapp
(1983) that deal with the pumping cost benefits of conservation, and Harris (1994) and hi1cXeill and Tate
(1991) that address the effect of conservation on the treatrnent cost of water suppliers.

56
policy as they relate to Ïmplementation c o s t ~They
. ~ ~ show that where groundwater policy

may require change, the expected benefits from such a policy change should offset the

associated implementation costs. if an overail efficiency gain is to occur. Implementation

costs are cos& incurred by government or individuais to implement a policy change, e-g., the

cost of institutional change, administrative costs of measuring pollution and monitoring

groundwater extraction, and the social cost of t a funds. These costs can be substantial,

depending on the extent and nature of change. Smith and Tomasi (1995) suggest that they

rnay be high enough to prevent the efficient level of pollution.

In the Ontario context, several factors are Iikely to increase implementation costs of

implementing the proposed integrated quality-quantity management approach. Fm t, the

Ontario govemment would need to change the statute that exempts some dornestic and

agricultural activities from the authority of the Ontario Water Resources Act (OWRA). This

is important because the province cannot apply its groundwater quality improvement

program or its demand management program to d l users until it has full powers of exclusion

and enforcement in the management of groundwater resources. Current exempt users of

groundwater can be expected to incur costs to resist the proposed change. This would

therefore add to the costs of institutional change.

Second, the OME would incur costs to increase knowledge about the state and use

of groundwater resources. Technical information about stock, quaiity, and movernent of

*' Smith and Tomasi (1995) refer to these cos&as "transactioncostr". However, Lhis usage of the terni
confuses the original sense of the term as used by Coase (1937 and 1960). which is the cost incurred to
negotiating market exchange. Instead term "implementation costs" is used to identify the costs of implementing
a policy option.
groundwater is sufficient oniy in a few of the province's aquifers. High cost could be

incurred to acquire this information (di Giantomasso et al., 1998 and Robertson, 1998).

Resource requirements include the cost of ddling and maintainhg observation weIls, costs

of instalihg water metres on all weils to measure extractions and, the cost of monitoring of

land use practices.

Once implementation cos& are accounted for, implementing a new groundwater

policy may not be economically desirable. In such a case, the sram quo though theoretically

inefficient, would be the best outcome until potential efficiency gains related to increased

scarcity make it feasible to change (Dernsetz, 1967). Empirical estimates of implementation

costs are not provided in the discussions of Chapters 3 and 4. Irnplementation costs are

temporarily set aside to focus on economic optimization using the integrated approach.

However, implementation costs are critical to policy analysis in groundwater management.

Therefore, the issues are reopened in Chapter 5 when the results of the integrated approach

are known.

Conclusion

This chapter surnrnarized the twofold problem with groundwater management in

Ontario. First, by relying on the current structure of property nghts and policy instrument.

policy makers have not opened the way for economic information to be incorporated into

decision making. The absence of economic information in resource use will create greater

inefficiencies as the resource becomes more scarce. But the required institutional change will

not occur until the expected efficiency gain exceeds the associated implementation cost.

Second, policy makers in Ontario have not sufficiently recognized the economic
interrelatedness of groundwater quality management and quantity management. The

separation of both types of management is quite comrnon in the groundwater economic

literature. However, integrating quality and quantity in an optimization approach could be

beneficiai because of its ability to bring dissimilar uses of the aquifer under a cornmon

denominator, which is economic benefits fi-om human activities. Groundwater quality

improvement rnight have cost-increasing effects on water extraction such to the extent that

the benefits of a water quality program may be overestimated in an unintegrated approach.

Accordingly, this chapter makes the case that an integrated approach should be adopted in

the economic analysis of groundwater use. An economic mode1 of the proposed integrated

approach is presented in the proceeding chapter.

 Chapter 3

An Integrated Qualiîy-Quantity Mode1 For

Groundwater Management

3.1 Introduction

The previous chapter presented a case for an integrated approach to groundwater

management- It showed that most groundwater utilization models follow a tradition of

finding appropriate management regimes for the large, deep aquifers in arid regions that

experience limited recharge relative to withdrawal (Dixon, 1988, Ebarvia, 1997, Feinennan

and Knapp, 1983, and Gisser and Sanchez, 1980). In most of these approaches, the economic

problem focuses rnainly on finding the benefit-maximizing inter-temporal allocation of

groundwater stock. But where groundwater quality. rather than quantity appeared to be the

problem, a tradition of water quality Iiterature ernerged almost to the exclusion of issues

about extraction and water table height (e-g., AbIer and Shortle, 1991, House et ai., 1997, and

Lintner and Weersink, 1998). Chapter 2 showed that groundwater utilization involves a

range of environmental and economic activities that should not be studied separately. Studies

that focus exclusively on one activity, e.g. extraction, may fail to account for the full value

of benefits provided and thereby. may under-vaiue the resource in the process (Bergstrom et

al., 1996).

The purpose of this chapter is to develop the mathematicd mode1 to determine how

groundwater c m be utilized optimally while accounting for the economic value of two

dissimilar benefits provided by the aquifer. This mode1 will then be used as a tool to
formulate hypotheses that can be tested ernpïrically. Three distinct users of groundwater are

identified (private extractors, municipal extractors and nonextractive users) and the benefit-

maximizing Ievel of activity by each user is prescribed.

A dynamic programming model of the integrated approach is set up and solved

analytically for two scenarios. The fmt is a common pool institutional arrangement

characterized by the freedom of land owners above the aquifer to withdraw or pollute

groundwater without penalty or prosecution. Standard resource theory suggests that this

arrangement would result in an inefficient outcorne. The second is the optimal outcome

characterized by the decisions that account for the extemal costs of extraction and pollution.

The two contrasting scenarios are used as distant ends on the spectrum of groundwater

management choices and serve as reference points for cornparisons in later chapters.

The analytical device used is m adaptation of a model by Provencher and Burt (1993)

that investigates the extemalities associated with the common pool exploitation of an aquifer

by a number of identical extractors. However, the Provencher-Burt Mode1 is not well suited

to address some of the major water management challenges in Ontario. For example, in

addition to the problems posed by Provencher and But, water managers often deal with the

problern of agricultural waste pollution (Cherry, 1987, Freeze et al., 1996, and Reynolds and

Fielding, 1987) and groundwater interference by large scale extractors within relatively

loosely defined institutional arrangements. The mode1 developed in this chapter will be

theoretically applicable to the general aquifer optïmization problem and specificallyrelevant

to current issues confionting Ontario's groundwater managers.

The rest of the chapter is organized as follows. The next section identifies and
elucidates the nature of the dissimilar uses for groundwater and defines the external costs

associated with hem- Section 3.3 presents and solves the dynarnic proeofamming mode1 for

optimal aquifer utilization in the presence of dissimilar user groups under a cornrnon pool

arrangement and under sociaily optimal decision making. Section 3.4 discusses how the

private and optimal decisions are affected by variations in pumping technologies among

users. Section 3.5 concludes with a discussion and summary.

3.2 Dksimilar Uses and Costs of Groundwater Use

As discussed in Chapter 2, competition for groundwater resources occurs among

heterogeneous users who receive different kinds of benefits from the use of the marginal unit

of groundwater. The model in this thesis allows for two types of uses of the aquifer:

extractive uses and non-extractive uses. In some cases, extractive mes of the aquifer include

al1 uses where water must first be extracted from the aquifer before it c m provide economic

benefits, eg., extractions associated with crop and livestock production, industrial production

and domestic consumption (urban and mal). A non-extractive use of the aquifer occurs

when economic benefits are derived without having to extract water, e-g., when the aquifer

assimilates agricultural waste related to animal rearïng and field fertilization. The approach

in modeiling extractive and non-extractive uses of the aquifer will first be explained before

the model specifications are presented.

3.2.1 Extractive Use

In the mode1 to be presented, the extractive user of groundwater receives a periodic

62
benefit,g(wJ, which is a function of the amount of water withdrawn in time t, w,. Withdrawal

is a rate expressed in uni& per penod of time - cubic metres per year. Groundwater is a

, > O and
normal good with the properties that g 4.'The benefit is net of al1 costs except

extraction and treatment costs.

The cost of supplying groundwater of a given quaiity at thne t is a function of the rate

of withdrawal, w17stock of water in the aquifer at time t, x,, the cumulative residuals of onsite

disposal, and the price of energy (nonnalized to one). Thus, total variable cost is denoted

by c(x, gC)w, .This cost function is in fact additive since the cost of sripplying groundwater

comprises two important activities: extraction and treatment.

The marginal cost of pumping water to the surface is constant, c, = O. The smaller

the stock of groundwater as a proportion of capacity, the lower the level of the water table

and greater the vertical distance over which the pump must draw water. Consequently, the

marginal effect of stock on extraction cost is negative, c, 4.This implies that the greater the

withdrawal of water in period t, the higher the marginal cost of extraction in a future period.

Where there are multiple extractors with unregulated access to a comrnon aquifer, the

extractions of one user will increase future extraction costs for al1 users. This is a primping

cost extemalig (Gisser and Sanchez, 1980).

It is important to distinguish between cumulative residuals of onsite disposal, &',

and onsite disposal occming during penod t, Ïu; .The former is the stock of excess nutrients

in the aquifer in period t; the latter is the flow of nutrients (leachate) from agriculturai fields

See Appendix A for the definitions of most notations used in this chapter. Where denvatives are not
explicitly written, the derivative offlx) with respect to x is expressed f,
per penod. The research evidence is that might affect (CInot not only in penod t but also

in successive penods (as is discussed in section 3.5). An increase in the cumulative amount

affect the cost of supplying water by increasing the treaû-nent

of onsite disposal in time t WU

cost. Thus, the derivative of the cost function with respect to p i s positive, c, > O. While the

effect of stock on the cost function is negative, the effect of onsite disposal is positive.

3.2.2 Non-Extractive Use

The non-extractive user of groundwater (let us assume a famer) gets a benefit from

using the aquifer for onsite disposal. Onsite disposal resulting from agricultural production

becomes undesirable if it impairs the quality of groundwater. Nevertheless, if famers are

required under a liability rule to reduce groundwater pollution from agricultural activities,

they would incur abatement costs that would lower profits. Thus, the abatement cost avoided

is the benefit of onsite disposal, gd.Throughout this dissertation, the tems benefit of onsite

disposa1 and abatement costs avoided are used interchangeabIy. The costs avoided represent

a portion of the profits from agricultural production and are a function of the quantity of

inputs, such as pesticides and nutrients, denoted Ir Hence, gd = gd(It).However, this mode1

assumes that there is only one endogenously determined input which is nitrogen, the main

source of groundwater pollution in Ontario.

The benefit function for input I is assumed to exhibit diminishing marginal returns.

Thus g,d 2 O and g,p < O. In words, agriculturai profits can be expressed as a function of

nitrogen inputs, such that, as the amount of nitrogen fertilizer increases, profits aiso increase.

However, this is not a constant relationship.

 Profit maxllnization by the farmer determines the amount of nitrogen application.

However, not ail of the nitrogen is used up in plant growth or dissipated by nature. Residual

nitrogen may leach into underlying groundwater (Huang et al., 1996). The amount of

leaching depends on the amount of inputs as is described in the relationship, # = h(iJ where

# represents units of ernissions per hectare and & is the amount of nitrogen application in kg
per hectare per yeac2

It is assumed that & > 0, and that this relationship is predictable, once choices

regarding crop mixes and production systems have been made. Consequently, emissions are

a joint product of profit generation. For that matter, since gp z O and g," c O, this also

implies gd* z O and gd#p CO.

Assume that institutional arrangements constrain the farmer t 3 avoid groundwater

pollution. In order to reduce the amount of leaching, under crurent technology, smaller

arnounts of inputs must be applied or more costly alternative production practices that reduce

emissions must be employed. Either action would reduce producer profits (Hopkins et nl-,

1996). By using the aquifer for onsite disposal, the cultivator avoids pollution abatement

costs that c m be estimated as the size of the net income that wouId have been forfeited to

reduce emissions-3

Figure 3.1 presents a graphical illustration of the foregoing argument. Panel (a)

' A number of factors, such as the use of best management practices, topopphy and seasonal variations
in the propensity to leach, can affect emission of substances into groundwater. We hold these factors fixed.

This concept of onsite disposal as a private economic benefit can be extended to al1 activities with
significant emissions of waste into groundwater, such as livestock farrning operations, industriai disposal,
municipal waste treatment disposal and private domestic waste disposal. In some cases, the release of waste
into groundwater is a deliberate act, e.g. indusuial disposai, while in others it is an unavoidable by-product of
particular processes. This paper is concerned oniy with the case of onsite disposa1 of agricultural waste.
depicts the relationship between nitrogen fertilizer use, I,, and onsite disposal, @. Panel (c)

represents the relationship between I, and agicultural profits, g t,and projects its vertical
axis ont0 panel (d). Panel @) projects the arnount of onsite disposal associated with a given

level of nitrogen input ont0 the horizontal axis of panel (d). Panel (d) is the result of the

relationships in panels (a), (b) and (c); it shows the response of profits to desired changes in

onsite disposal. Clearly, the derivative of the function, gp(& ), in panel (d) is the marginal

abatement cost avoided function or the marginal benefit function for fi.

To the f m e r , the cost of onsite disposal is zero, since under a common pool

arrangement it costs himher nothing to allow residud nitrogen to mn into the groundwater.

( N a d y , a fanner that extracts groundwater would have accounted for the effect of onsite

disposal on hisher cost of supplying water.) However, at some point, onsite disposal will

impose extemal costs for extractive users of the aquifer. This may happen as nutrient and

pesticide leachates increase the stocks of contaminants, thereby rendering groundwater unfit

for domestic, industnal or commercial use without treatrnent. This forces water suppliers to

find alternative sources of uncontaminated water. Alternative supplies can be found but with

signifcant increases in the marginal cost of water, whether this cost is incurred to treat the

contaminated water or to find alternative sources (RMW, 1996): The mode1 approximates

the marginal extemal cost of onsite disposal as the marginal cost of treating contarninated

4
Sorne researchers argue that extemal costs of water contamination are incurred only after some criticaI
water quality threshold has been reached and where human population is affected e.g- Van Vuuren er al.
(1995). This is an empincal issue and will be deait with in the section that covers empirica1 results.
 Figure 3.1 Gruphical Derivation of the Ben efit Fun ction
For On-site Disposal

On-site On-site
D isposal (4 D isposal
(Vnits ha/yr) m i r s hw'yr)
(W

O ! I !I* Nitmgen
I I i application 1 1
1 I 1
t I
I fig/ha&rJ ! Ï
1
Disposal
I
1 1 I I 1 (Vnits ha/yr)
I 1
I
1 '
Profits;
Ï
i i1
Profirs 1 1 I
S hafyr

Source: Adapted fiom Yiridoe and Weersink (1998) (Vnits ha/Yr)

groundwater water.

3.2.3 Externalities

In order to solve the aquifer utilization problem groundwater managers must

intemalize the extemalities arising from common pool use of the aquifer. Groundwater use

may create externalities in three ways. First, when the rate of recharge for an aquifer is less

than the rate of extraction, further extraction lowers the water table over the entire aquifer,

thus, uicreasing the marginal cost of extraction for al1 extractors (Burt, 1967, and Gisser and

Sanchez, 1980). Second, locaiized declines or cones of depression in the water table in

response to high rates of withdrawal (mainly by municipal or industrial pumps) may make

it more expensive for extractors with smaller and shallower wells to pump water from a

greater depth (RMW, 1985). This localized externality can exist whether or not there is

groundwater scarcity, i.e., whether or not withdrawal exceeds recharge. Most groundwater

models do not mention this type of externality. Whether cones of depression have been

avoided because of the insignificance of their effect given the cumbersome nature of the

modelling is not known. However, in the empirical application of this model, cones of

depression are considered.

A third externality, extraction-related stock extenzality, is caused when recharge is

less than extraction such that the withdrawal of a unit of groundwater from the aquifer not

oniy increases extraction cos& but also reduces the stock of water available for use by other

users in the future. Under comrnon pool arrangements, extractors have less incentive to

conserve groundwater than under another arrangement that requires extractors to account
for their actions- In a sense, current extractors create an externality that lowers the social

value of groundwater for future generations. This is the central problem in a number of

studies e.g. (Feineman and Knapp, 1983, Negri, 1989, and Tsur and Zemel, 1995).

On the other hand, onsite disposal can create externaiities for groundwater extractors

in two ways. First, a pol[lrtion-related stock e x t e m a l i ~may occur because of groundwater

pollution in excess of the sociaIly optimal amount. The impairment of groundwater may

necessitate treatment upon withdrawd, thereby creating external costs for extractors and any

other users of groundwater? Second, while pollution may increase the cost of supplying

water, it is conceivabte that if the pollutant remains confined in a sector of the aquifer, the

resulting decrease in extractions from the polluted sector can help to maintain the level of

the water tabIe in the non-polluted sectors. In effect, a cost-reducirzg prrmping externalis)

c m be created by onsite disposal.

In examining these externalities, notice that extractive users of the aquifer derive

benefits frorn pumping groundwater but in the process may create externalities on other

extractors, On the other hand, individuals using the aquifer for onsite disposa1 also derive

benefits but may inflict costs related to groundwater pollution or convey benefits associated

with water table elevation.

3.3 A Dynarnic Programrning Mode1 For Optimal Aquifer Use

Having described the nature of dissimila. and (perhaps) antagonistic uses for an

Apart from costs incurred by groundwater extracton there may be costs related to the decreased value
of surface waters affected by increase nutrient loading. This environmental cost has not been included in the
analysis.
aquifer, several important questions ernerge. WiII this approach provide any useful

information regarding the optimal utilization of groundwater? Specifically, how will

individual users behave under a common pool institutional arrangement? And, how wouId

this behaviour differ from an mangement that accounts for the internalization of

externalities? This section suggests some answers.

Groundwater users might be expected to utike the resource in a manner that

maximizes the present value of their individual or private benefits. Today's decisions by

resource users will be influenced by the size of future benefits and costs. Yet, these future

benefits and costs will be determined by the current decisions @urt, 1967, and Gordon,

1954)- Hence, each groundwater user's problem c m be characterized as one of finding the

optimal utiiization path through time that equates marginal benefits of current use and the

marginal benefits of conservation. This balance can only be found when the externaiities

have been accounted for in the integrated model. The dynamic optimization tool chosen to

solve the problem is dynamic programmina. A bnef explanation about the use of that tool

will follow in the next section-

3.3.1 Structure Of The Dynamic Programming Problern

The typical dynamic programming problem involves the use of functions that define

the econornic value of the resource stock. Let the present value of an individual's private

benefits from an aquifer be given by V,, which is a function of the time paths of groundwater

withdrawal (wJ, current resource stock (x,), onsite disposal (Pr)and current stock of onsite

disposal (p:). The value function is defined:

where p i s the discount factor, R, is the measure of net gains from the resource in period t.

and T is the length of the planning horizon. The stated problem can be approached as a

dynamic programming problem and analytical solutions can be derived with the Lagrangian

optimization procedure?

3.4 Groundwater Utilization Under Private Decisions

Under pnvately optimal decision making, the mode1 assumes that access to

groundwater is charactenzed by cornmon pool rights arnong owners of land over the aquifer.

Such an institutional arrangement discourages conservation and results in inefficient

groundwater use (Brown and Deacon, 1972, Negri, 1989, and Worthington et al., 1985).

Provencher and Burt (1993) support this conclusion but provide further insight by suggesting

that this inefficiency emerges pnmarily because there is a non-cooperative dynamic garne7

played out in Nash strategies among aquifer usen. In the presence of non-cooperation, each

rational user of groundwater may be expected to pursue a policy that reflects hisher best

reactions to the decisions of d l other users of the same aquifer.

An equilibrium in Nash strategies occurs when each user of the aquifer maxirnizes

the value of groundwater to him/her given the strategies of al1 other groundwater users

For a cietaileci discussion of the formulation of the dynarnic p r o m n g problem, see (Kennedy, 1986).
7
A noncooperative game is one in which the potentid private benefits from using a resource are such ùiat
they motivate individual resource users to pursue individual strategies nther than strategies that promote the
good of al1 resource usen as a cornrnunity (Ostrom et al., 1994). The prirnary cause of this outcome is hi@ cost
of negotiating cooperation arnong land owners.
Provencher and Burt, 1993). For example, if there are N identical users of groundwater with

N strategies, an equilibriurn exists if the jh strategy (for al1j = 1 ...N) maximizes the value

of groundwater to the j" user, given the N-1 other strategies. Clearly, since users are

identical, al1 users would pursue the same policy.

A non-cooperative garne in Nash strategies can be analysed using a dynarnic

programming approach, as Provencher and Burt demonstrated for the case of groundwater

extraction. This model adapts the Provencher-Burt model to analyse extractive and non-

extractive groundwater uses. Instead of one stock variable and one decision variaMe, as in

the Provencher-Burt model, this model uses two stock vanables and three decision variable^.^

Assume that there are three types of users of groundwater occupying land over an

aquifer. One is a homogeneous group comprising N pnvate or self-supplied extractors. In

addition, there is one municipal extractor that distributes water to a diverse clientele. The

private and municipal extractors represent a total N-tl extractive users of groundwater.

Among the N extractive users of groundwater d l members have identical benefit and cost

functions. These users obtain supplies of water pnvately by extracting it with their own

pumps. A unit of groundwater extracted by private means is denoted rvP. The municipal

extractor, whose extraction is w ", has different benefit and cost functions compared with

self- supplied extractors.

For ease of discussion and illustration, let there be one agricultural producer that uses

The significant difference between this rnodel and Provencher and Burt (1993) is not merely in the
number of variables; it is the departure from accounting onty for extractive uses of groundwater to accounting
for extractive and non-extractive uses. There is no suggestion that this model is as technically demanding as
that by Provencher and Burt.
groundwater for onsite disposal*This user is not an extractive user and therefore does not

direcrly affect water table height. However, it will be shown that onsite disposal affects water

quality, which c m affect rate of extraction and indirectly affect the height of the water table.

3.4.1 Cornmon Pool Outcome of Privately Supplied Extractor

Consider one of the N privately supplied extractors of groundwater (e-g., a rural

resident). This user's problern is to rnaximize the present value of the stock of water at tirne

t, V,(xJ, defined by the following value function:

Max
Vt(xt) = p [g ~ ( \ %-C(Xt,q+p
f) 4- p V*-[(xr -w: -(N-1)y! - -5
m-
+QI
W,

The tem. g,P(wtP) - P(+ &))zP

is the cument net benefit of groundwater withdrawai

by this private extractor, where gt P(w,P), and d'lx, &)'IV: refer to benefits and costs,

respectively. Since a11 privately supplied users of groundwater share homogeneous benefit

functions, their rates of extraction are also the sarne. Consequentiy the combined withdrawal

of the remaining N-I privately supplied groundwater users is (N-l)wP: These extractions

have been distinguished with * to indicate that they represent the optimal decisions of the N-

I privately supplied users that (we assume) are aiready pursuing Nash strategies for

extraction. Likewise, w "* represents the optimal decision of the municipal extractor that is

d s o pursuing a Nash strategy for extraction.

Typically, aU optimal decisions in dynarnic programming models are functions of the

state variable, x. So optimal decisions w P'and w "* could have been written w P*(xJ and

w"*(x,) respectively. However, in order to reduce cluttering, this method of presentation will

not be adopted in the rest of the discussion.

The term V,,(.) is the value of the stock of water remaining in perïod t+l. The

constraint in equation 2 restncts the amount of water available to this user to the stock at the

beginning of the period less the optimal extractions of all other users? The penodic recharge

(r) is net of precipitation plus retum flow h m surface uses less natural discharge and occurs

instantaneously at the end of period t.lo

The Lagrangian expression for equation 3.2 is:

From the first order conditions, the following Kuhn-Tucker conditions must be met:

9
For completeness, there should be an second lagrangian multiplier preceding the equation of motion for
the cumulative amount of onsite disposai.

Io : are governed by equations of motion;q+,=4 - total extraction + recharge and fi+,'=@

Both x, and p
c + $i+I. Because recharge occurs instantaneously at the end of the period, r, is excluded from equation 3.5.
 In equation 3.4 the expression fh3V,,P/i3xt+, is the discounted marginal value of a

change in stock in period t+l; it is what this user would forego by extracting an extra unit in

period t. The privately supplied user will choose a level of extraction where the net marginal

benefits of extraction in penod t are equai to paV,+,P/ax,+,.The term A/' is the Lagrangian

multiplier for the objective function; it represents the marginal value of water to this user in

period t if the stock was increased by one unit.

By rearranging (4) we get

This alternative expression of equation 3.4 says that A/' is equal to the marginal benefit of

extraction less the marginal cost of extraction less discounted marginal value of an increase

in stock in period t+l. Thus, releasing the stock constraint by one unit produces a benefit

equal to the current net benefit less the inter-temporal user cost.

The value of depends on whether equations 3.5 and 3.6 are binding (Beckmann,

1968). If the left hand side of equation 3.5 is binding, extraction in that period exhausts the

available stock. One more unit of groundwater would therefore add to the welfare of the

extractor. Hence A,? would take a value greater than zero. If the left hand side of equation 3.5

is greater than zero, and thus the constraint is not binding, then an extra unit of the stock
would add no benefits to the value function, so, A,!' = O. According to these relationships,

equation 3.6 is aiways binding.

3.4.2 Common Pool Outcome Of The Municipal Extractor

The municipal extractor faces a problem that is similar to that of the private extractor:

Proceeding as before, and providing that the Kuhn-Tucker conditions are met, the first order

condition from the Lagrangian yields:

Like the private extractor, the municipai extractor chooses an extraction rate where

the net marginal benefit of municipai extraction is equal to the discounted marginal value of

groundwater stock (to the rnunicipality) in period t+l. Notice that the discounted marginal

value of groundwater stock is the private user cost to that extractor. An equilibrium exists

as iong as the net marginal benefits of the municipal extractor are equal to its user cost.

The important result that falis out is: user costs need not be the same across different

extractors. Specifically, PdVWlP/a>l,, /a%+,since no condition

might not be equal to pdVwIm
requires them to be equai. The municipal user cost is detemiined by the size of municipal

benefit and costs given the Nash strategies of all other users. So the equilibrium in equation

3.8 is maintained whether or not the user costs of other users are equal.

If the benefits and costs of use are identical for all users, as some economists assume,

then their private user costs will be identicai. However, self supplied extractors withdraw

d' primarïly for domestic purposes. But the municipal supplier extracts id" for higher valued

purposes other than domestic use only and does so, usually, at a lower marginal cost. So, it

seems that the municipal extractor has a greater incentive to conserve water (Le., has a higher

private user cost) than other extractors. This inference is supported by the fact that it is

municipalities that often make the initiative to implement strategies to conserve water for

their clientele since doing so is cheaper than finding new sources. Nevertheless, this

incentive is not strong enough when compared with that required to achieve the social

optimum as is demonstrated in equation 3.14.

3.4.3 Common Pool Outcome With Onsite Disposa1

The value of agicultural waste assimilation in penod t to a person using the aquifer

for the onsite disposal of waste is maxirnized when the additional inputs of nutrients and

pesticides make no further contribution to agricultural profits. This can be confirmed by

solving the agricultural producer's problem:

Max
q g,dW
where g,d is the net cost avoided through onsite disposal.

Equation 3.9 indicates that this nonexmctive user of groundwater does not consider

the effect of curent onsite disposal on hiture opportunities for waste disposal since disposal

today does not destroy an oppomuiity for disposai tom~rrow.'~The solution of equation 3.9

is to choose PI where agd/a$ = O-This hpLies that the f'er's private user cost of onsite
disposa1is zero. This indicates that choosing a level of onsite disposal greater than qYru;'that

solves for the fmt order condition wodd lower profits. However, the choice of Prdoes not
affect gdin any future period. Thus, there is an incentive for the f m e r to consider the effect

of onsite disposal on hisher welfare or the welfare of extractive users.

The above result corresponds to Iru;'

in panel (d) of figure 3.1 where the function

reaches a maximum. Nevertheless, the level of P I associated with this farmer's

solution might reduce the stock of potable groundwater available for extractive users. So,

under cornmon pool arrangements, a benefit-rnaximizing decision on the part of the onsite

disposer would be non-optimal if external costs or benefits of onsite disposal are incurred.

This is further developed in Section 3.5.

More likely than not, the famer is also an extractive user of groundwater. Ln such a

case the famer's problem would be quite different from that stated in equation 3.9 and

should be rewntten

" This assumption would be the quite redistic since, over some reasonable range of ernissions, there
is no noticeable decrease in the aquifer's capacity to accept more waste. However, limitless ernissions would
result in the aquifer becoming saturated with waste to the point that land on which the emitter operates is
overwhelmed. This latter possibility is a special case that we assume will not occur.
 Max
Vt(xJ = ,q

From the Kuhn-Tucker conditions, the f m e r would extract groundwater to the point where

the current net marginal benefit of extraction is equal to the future net marginal benefit of

conservation. This optimal choice of extraction is no diKerent from the result of the private

extractor obtained earlier in equation 3.3. The difference is in the arnount of onsite disposal.

The farmer wodd now take into account the effect of onsite disposai on hisher drinking

water such that the marginal cost of contamination does not outweigh the marginal

agricultural benefits. This is sumrnarized in the expression

a*, a*,

This equation says that the marginal cost avoided must be at least equal to the current

marginal cost of water quality degradation plus the effect of 9,on the future value of the
remaining stock of water to this particular farmer.

The final terni in equation 3.1 1 must be interpreted with care. It does not state that

onsite disposal (Pt)c m S e c t the stock of water in the aquifer (x,,,), but it States that onsite

disposal in one period has an effect on the value of the stock of water in a Iater period. A

more detailed explanation of the term is given in the following section.

In sumrnary, this section shows that, under common pool arrangement, each
groundwater user type may respond to a different private user cost. The three solutions (for

extractors and onsite disposers) are privately optimal given that al1 other groundwater users

are pursuing their own goals of benefit maximization. These outcomes are therefore

privately optimal solutions under a comrnon pool institutional arrangement. However, what

the groundwater manager seeks is the socialïy optimal solution which is quite different from

the privately optimal solutions if externaiities exist.

3.5 Groundwater Utilization Under the Social Optimum

IR contrast to solutions under common pool, solutions for a social optimum are

derived such that external costs associated with each action are taken into account. Decisions

are made only if their contribution to the total benefit of society equals or exceeds the cost

incurred by society. This section examines the decision d e s for al1 groundwater users when

they interndize external costs.

The decision rules for the socially optimal use of an aquifer c m be denved by

maxirnizing that following total value function to both extractive and non-extractive users

Mar
WI) =wp ,",&
,\$. rNcgp(wp>-c 'cx,.q;)~vp) + -C m(x,,q:)»7
grrn(yrn)
 The groundwater managers must now choose levels of wp, wcmand Jr, to maximize

the present value of the stock of groundwater in period t. Recall that the benefit functions for

N privately supplied user and one municipal user are functions of the amount of water

extracted. The non-extractive benefits of groundwater are a function of the arnount of onsite

disposal, fi.

The Lagangian is:

The first order conditions yield optimal solutions in equations 3.14 to 3.16, where w, 2 O and

lpt 2 O."

We now have result in equations 3.14, and 3.15 that the conditions for optirnality are

" Again the associated Kuhn-Tucker conditions are assumed to be met.

81
achieved when the user costs of al1 extractors are equal. This opportunity cost is

(N+I)PdV,,/dx,,; it is the present value of a marginal unit of groundwater stock to ail

extractors in period t + I . Individual extractors choose extraction rates where the net marginal

benefits of extraction are equal to the discounted marginal value of groundwater stock to al1

extractors in period t + I .

This results in equations 3.4, and 3.15 are not very different from the result derived

by Provencher and Burt (1993). The o d y différence is in the addition of rnunicipd extractor.

What it shows is that irrespective of the specific benefit function or the extraction and

treament technologies used there must the same incentive for conservation must be applied

to al1 extractors. The importance of this explicit result will be made clear later.

3.5.1 The Marginal Cost of Onsite Disposal

Equation 3.16 contains the new and, perhaps, pivotal result that at the social

optimum, the net marginal benefits of onsite disposal are equal to the reduction in the

marginal discounted value of groundwater stock in penod t+I brought about by onsite

disposal penod t . The last bracketed term in equation 3.16 can be replaced with x, since

and equation 3.16 could have been rewritten

~ + 1 ( ~ , + 1V,+,(X,+W~-rr),
)=

agf
--Np
a=; acrm
-- = -(N+l)P aVr&pJ
a*, a*, a*,

This is the approach used in equations 3.14 and 3.15 where the term V,+,(x,+,) was

abbreviated as V,,. We will use the abbreviated version of the expression for the value
function in the discussion to follow.

From dynamic programming pnnciples, and from the definition established in

equations 3.1 and 3.2, for any period the value of the aquifer can be stated as specific cost

and benefit functions instead of as a function of the state variable (See Kennedy, 1986).

Thus13

Differentiating equation 3.17 with respect to iCr, would show the effect of a change in onsite

disposal in penod t on the extractive value of a stock of water in period t+l. This yields '

Equation 3.18 can now be substituted into equation 3.16' so that

l3 Equation 3.17 rnay pose one difficulty in interpretation. If there are N+I extractive users represented in
the left hand side of equation 3.17, why is cost avoidance function for onsite disposa1 included in the ricght hand
side? The difficulty is exptained as follows. The net benefits of extractive uses of groundwater are functions
of the stock variabIe, however, the cost avoidance function is not a function of groundwater stock.
Nevertheless, onsite cost avoidance is a variable in the value of the aquifer, which is the object of the
maximization problem.

14
with respect to q, is zero.
The denvative of gd(@,+,)
Further, (N+l)dV, /a$[ can be sequentiaily expanded and cost and benefits functions in the
marner outlined for equation 3.17 to the point where the value of dVLii/diCr, is zero, i being

some time in the future- (This point can only be determined empincally.) Thus

where i is a series of years in the future over which in period t has an effect on VCii(the

value of of the aquifer for extractive purposes), and h is the maximum length of tirne the

effect of iCr, Iasts.

Substituting equation 3.20 into equation 3-16', yields ls

Examination of equation 3.21 will reveal that the agricultural producer no longer

chooses & where its marginal benefit is zero (equation 3.9) or where marginal pnvate benefit
is equal to marginal pnvate cost as in equation 3.1 1. The farmer chooses & where the

marginal benefit is equal to the present value of the sum of dl marginal effects of & on the

cost supply functions of al1 extractive users.

Under the fmt order conditions of the socially optimal solution. the optimal time path

"The mode1 by Fleming and Adm(1997). which also inteptes water quaiity and qumtity concems, does
so having established a given water quality objective. Extraction and farrning activities affect the concenmtion
of pollutants in the aquifer. In contrast, from equations 3.14.3.15 and 3-21, the activity levels are estabIished.
 Under the f m t order conditions of the socially optimal solution, the optimal time path

of onsite disposal is an argument in the optimal choice of groundwater extraction (equations

3.14 and 3.15). Simdtaneously, the optimal time path of groundwater extraction is an

argument in the optimal choice of onsite disposal (equation 3.16). Clearly, neither of these

results can be derived independently. They m u t be detemined simultaneously.

It is now possible to discuss briefly some of the results that are contained hi the main

equations and formulate hypotheses that can Iater be tested ernpirically. For ease of reference

most of these hypotheses are presented in table 3.1 which shows the effects of changes in

selected functions and exogenous variables on groundwater extraction and onsite disposal.

These results are discussed under three headings:

(a) marginal benefitkost function and groundwater distribution

(b) temporal significance of onsite disposai, and

(c) stock implications for onsite disposal.

(a) Marginal benefrr/costfunction and groundwater distribution

First, equations 3.14 and 3.15 show that even when there are dissimilar users of

groundwater, al1 extractive users respond to the same user cost for the socially optimal

outcome. This user cost is therefore called the social user cost. A change in one benefit or

cost function of any extractive user type will affect the distribution of water and social user

cost. Other things being equal, the higher the value of the marginal benefit function for

extractive use, the greater the value of the social user cost. The increase in the socid user

cost provides an incentive conserve water while an equal incentive in not provided through

the private user cost.

 For a given social user cost, however, an increase in the marginal pnvate extraction

cost function will lower extraction. This means that exogenous changes in pnvate costs of

extraction and treatment will provide incentives for conservation indirectly. Table 3.1

outiines the relationships of other exogenous changes to the optimal choices of withdrawal

and onsite disposal (e.g., changes in cost fimctions, number of extractos, and horizon dunng

which onsite disposal affects water quaiity). The relationships are given without formal proof

but are tested in the empirical work of chapter. Thus, Table 3.1 serves a set of testable

hypotheses.

Second, the social user cost is larger than the private user cost derived under cornmon

pool arrangements. (Appendix B derives and explains the composition of this user cost under

privately and socially optimal outcornes). This is because the incentive for groundwater

conservation under private decision making is reduced by the extemal costs of over-pumping

and pollution by other users. This may be inferred by comparing equations 3.4 and 3. 14.16

Third, differences in technology and in hydro-geology ofien contribute to differences

in the cost structure of groundwater extractors (Bedient and Huber, 1992). Extractors with

the resources and flexibility to Iocate high yielding materials in the aquifer will do so,

lowering their costs of extraction. Also, extractors with more capital at hand can purchase

more energy efficient pumps. Under a cornmon pool arrangement, these advantages could

discourage conservation; but under socially optimal decision making, technologicd change

may be better accounted for in a redistribution of benefits. This issue will be visited with

l6hovencher and Burt (1993) provide a rigorous proof that the social user cost is larger the
private users cost if the number of extractors exceeds one.
Table 3.1 Effects of Changes in Selected Exogenous Variables On
Rates of Groundwater Withdrawals and Onsite Disposal:
Static Analysis Under The Social Optimum

Exogenous Change in Endogenous Relationship Equation

Function or Variable Variable Reference
Affected
marginal
extractive direct
benefit
hinction cost

wt
municipal direct

marginal
municipal indirect
cYxI$~ private
extraction w ithdrawal
I cost
,,
C
i=i
acr-1
external cost
O, onsite
disposd
Wt+i
future withdrawals;
Jrt
indirect

onsite disposd indirect

N - number of extractors qt
onsite disposai; indirect
,
individual withdrawals; indirect
w+m,
total withdrawals direct
h - horizon over which iCr,
onsite disposal affects onsite disposal; indirect
water quality Wt
individual withdrawals; indirect
(N+ 1)wt
total withdrawals indirect
static analysis.

Consider the private outcome for the municipality in equation 3.8. A technologicai

improvement that lowers the marginal extraction cost, now abbreviated cwm,would Iead the

municipal extractor to increase extractions up to the point where the increase in net marginal

benefits of extraction in the current penod is equal to the present value of increased future

benefits foregone. That is, to the point where the increase in the Ieft hand side of (3.8) is

equal to the increase in the right hand side. The municipal extractor would therefore practice

conservation only to the extent that future benefits are generated for itself.

In the socially optimal outcome (equation 3-15), a decrease in c,P will d s o Iead to

increased benefits in the current as well as future periods. However, with the absence of

externalities, the net benefits of a cheaper extraction technology are balanced against the

future costs of a Iower water table for d l extractors. This is so because the user cost in

equations 3.14 and 3.15 represents the value of an extra unit of groundwater to al1 extractors.

By comparing the two outcornes, it is evident that since the right hand side of

equation 3.8 is smaller than the nght hand side of equation 3.15, improved extraction

technologies under a common pool arrangement will lead to Iess conservation than under the

socially planned arrangement (as proved by Provencher and Burt, 1993). In addition, when

such a technology is available only to one user group (municipal extractors, as is assumed

in this case) that extractor becomes relatively more efficient. In the common pool

arrangement, this does not encourage much conservation since extractors compete for

availabIe groundwater stocks.

In contrast, under the socid optimum, groundwater may be redistributed from the
l e s efficient extractor to the more efficient extractor. Consider equations 3.14 and 3.15. To

maintain the equivalence of both equations, the arnount of water allocated to self-supplied

extractors must fall if the social user cost increases.

Figure 2 illustrates the foregoing case. Panel 1 represents the municipal extractor's

case where gwm,cw" and C, " represent curves for the marginal benefits of extraction,
marginal cost before technological change and marginal cost after technological change,

respectively. It is assumed that a reduction in extraction cost increases the municipal

extraction fiom w,P to W: and increases the oppomnity cost of extraction from A to B. Panel

2 represents the situation for dl self-supplied extractors; gWP,c," represent the marginal

benefit and marginal cost (respectively) of groundwater for self-supplied extractors. Assume

that the change in the present value of municipal benefits from improved technology exceeds

the increase in pumping costs experienced by private extractors. If decisions are made for an

optimal outcome, the amount of water allocated to pnvately supplied users should decrease

(say, from wIPto w ? ~as

) the pnvate extractor must respond to a higher social user cost.

The reaction of the municipal extractor is similar to Burt's (1967) conclusion that

improved purnping technology will increase current consumption. The difference in this case

is that while current extraction by the municipality will increase, extraction by self-supplied

extractors may decrease because of their lower net marginal extractive benefits as is shown

in the diagram. Whether or not the user cost increases or decreases is detemiined empirically.
Figure &.a Effects of Change in Pumping Techrology on
Groundwater Extraction and Allocation

Marginal
Panel I
Costlbenefit

Units of Ground-
water extraction

Marginal
Cost/benejir Panel 2

Units of Ground-
wafer extraction

Note: A = initial user cos?, B = user cost ajler technological changefor municipaliiy
 Just as exogenous changes in the marginal cost functions have implications for the

distribution of water, exogenous changes in the benefit function brought about by population

growth and the changing structure of rural water supply systems, will have important

implications for the allocations of groundwater between extractive users. Some of these are

presented in Table 3.1.

(b) The amount and temporal significance of onsite disposai

The socially optimai arnount of onsite disposal is lower than the amount of onsite

disposal under the common pool scenario. This is so because under the cornmon pool

scenario the f m e r choses a Ievel of onsite disposal where the marginal cost avoided is zero

(solution to equation 3.9). A zero marginal cost avoided is associated with the maximal

amount of onsite disposd, and the highest marginal cost avoided is associated with the

Iowest amount of onsite disposal. If the famer is also a groundwater extractor, the marginal

cost avoided would be non-zero (equation 3.1 1) but smaller than marginal cost avoided under

the socially optimal solution (equation 3.16).

The user cost for onsite disposal in equation 3.21 does not allow direct cornparison

between the marginal user cost of onsite disposal and extractive use of the aquifer. What is

clear is that an increase in the marginal extemd cost of onsite disposal on groundwater

treatment will require an adjustment in the arnount of onsite disposal, ceteris puribus. In

essence, the present value of the marginal increased cost caused by onsite disposa1 in period

t is the marginal user cost of onsite disposal. Thus, if this user cost increases there is a greater

incentive for groundwater quality protection.

It is the life span of the effect of qton the cost of treating water that determines the
size of the user cost Residuals fkorn onsite disposal that persist over a short time horizon will

impose relatively small costs on extractive users of water, while residuals from onsite

disposal that persist over a long horizon will impose higher treatment costs on extractive

groundwater users.

(c) Smck irnplicariorzsfor onsite disposal

Onsite disposal is not necessarily bad for groundwater extractors under al1

institutional arrangements. If in a cornmon pool arrangement, deteriorated water quality

forces extractors to reduce consumption, the externality created by onsite disposal would

produce a sirnilar effect as a higher user cost. The explanation for this apparently counter-

intuitive result is that where groundwater is polluted only temporarily, present pollution

forces extracton to delay extraction until some time in the future. By delaying consumption

the stock of groundwater is built up so that at the point in the future when it is extracted, the

marginal cost of extraction will be lower than if there had been no contamination. In fact, the

discounted value of future resource use plus the discounted savings from Iower pumping

costs could be large enough to exceed the loss in the current penod due to onsite disposal.

This c m be determined empiricdly.

The resdt above depends largely on the nature of pollution resulting from onsite

disposal. Clearly, permanent pollution cannot be beneficial to extractors in the present or the

future. Permanent pollution implies that the value of the honzon (h) in equation 3.21 is

i n f ~ t eThus,
. the value of cost avoided must be greater than or equal to the sum of all hture

increases in the cost of water treaunent as a result of pollution.

In the event that the marginal treatrnent cost related to permanent pollution is
infinitely high, the user cost of onsite disposal would be the total extractive value of al1

groundwater stock that cannot be extracted. This implies that long lived and highly toxic

substances wouid generate very high pollution costs that would likely exceed the costs

avoided by onsite disposal. Given the potentially prohibitive costs involved in managing

highly toxic substance in an integrated approach, this model is better suited for substances

that affect groundwater qudity over a temporary period, such as those associated with

agricultural fertilization.

If onsite disposâl affects the cost of treating water immediately, and dissipates some

time after, the overall effect would be to delay consumption briefly from the present to a

future penod. However, there may be a lag between onsite disposai and actual groundwater

pollution (discussed in Chapter 4). In that case, there may be no effect of onsite disposal on

current extraction but there may be an effect on future extraction.

3.6 Discussion and Summary

The determination of the optimal levels of activities affecting an aquifer remains an

important economic problem because of the water scarcity and water quality conflicts that

emerge from time to time. Chapter 2 showed that current methods for addressing these

problems may distort decision making away from the efficient outcome (Zachariah et al.,

1997). This chapter shows that recognizing the multiple use nature of groundwater resources

is a preliminary step in addressing the problem.

The integrated model introduced in this chapter selected three uses for groundwater:

private use, municipal use (which encompasses a multiplicity of uses) and onsite disposal.
Other uses, such as maintaining the biological diversity of creeks and wetlands, have not

been discussed but can be incorporated. Groundwater extracted provides a number of

benefits and generates related costs. Likewise, groundwater's assimilation of waste provides

benefits and associated costs.

The analytical results of the mode1 indicate that external costs are quite likely under

a common pool regime but are not inevitable (Section 33-1). Consistent with externality

literature, external costs are incurred oniy when the uses of groundwater are interdependent.

The severity of the interdependence depends on rates of extraction and levels of onsite

disposal as wel spatial factors such as distance between wells, hydro-geologic properties of

the aquifer, and the life span of contaminants.

The results show that onsite disposal is economicaIIy justifiable if the marginal

benefit of onsite disposal exceeds the value of the combined marginal extemal cos& of onsite

disposal. Where the private marginal benefit does not exceed the private extemal cost, onsite

disposa1 should be reduced. The difficulty is that the agriculturd producer gets no extra

pnvate benefit from groundwater quality protection. Al1 benefits go to extractive users.

In contras, the benefits of conservation on the part of extractive users go to extractors

exclusively. Clearly, the distributive effects of the integrated approach are an important issue.

This will be exarnined at the empirical stage.

The suitability of this approach to achieve the optimal utilization of groundwater

therefore depends heavily on the accuracy of economic information, such as benefit and cost

functions, and hydro-geologic information regarding the effect of extraction on the water

table, the effect of climatic factors that influence recharge and total groundwater stock,
technological efficiency of water pumps and the spatial distribution of wells and their effect

on the water table.

S~~mrnary

This chapter has presented an integrated model for groundwater quality and quantity

management. It has brought together two often separated aspects of the problern of

groundwater use optimization. While the model follows the standard dynamic programrning

methodology of resource stock optimization, its flexibility aliows for easy application to a

range of dissimilm uses for groundwater and the externalities associated with them. Under

socially optimal decision making, the marginal benefits and cost of onsite disposal are

balanced. But under privately optimal decision making, the social balance is not guaranteed,

and more onsite disposal could unintentionally create a cost reducing externdity - a result

that apparently has never k e n considered. Also, improvements in technology by one group

of extractors have the potentiai to redocate the arnounts of extracted water to the more

efficient extractors-

The analytical results that this chapter provides show that common pool institutional

arrangements for aquifer management will result in sub-optimality. They also show the

possible effects of changes in exogenous and endogenous variables on groundwater

extraction and onsite disposal. But the size of the welfare loss is not known and c m only be

deterrnined empirically. Chapter 4 will estimate the magnitude of this weIfare loss.
 Chapter 4

An Empiricd Study of the

Optimal LeveIs of Groundwater Extraction and
Onsite Disposal

4.1 Introduction

The previous chapter presented an anaiytical case that extractive and nonextractive

benefits of an aquifer should be considered to maximize resource benefits. A condensed

dynamic programming mode1 was presented to illustrate the central features of the

discussion. In short, the mode1 shows that

common pool institutional arrangements result in Iower user costs than under the

socially optimal integrated arrangement and, consequently, encourage non-optimal

rates of groundwater extraction and more onsite disposal;

at the social optimum, aU extractive uses of the aquifer face the same inter-temporal

opportunity cost, while extractive users face user costs directly related to the size and

duration of external costs visited on others;

changes in private costs (e-g., extraction and treatment costs) wiI1 affect the optimal

allocation extraction activities and onsite disposal,

higher marginal benefits for onsite disposal will increase the optimal level of onsite

disposal but reduce groundwater extraction;

the decay rate of the cumulative amount of onsite disposal in an aquifer influences

external cost;
f) the sïze of the cone of depression may influence optimal extractive and non-

extractive choices; and,

g) changes in pumping technology wi!l prompt the model to reallocate the optimal

distribution activities.

The purpose of this chapter is to apply the theoretical insights developed in chapter
3 to a groundwater management problem using ernpirical data from southwestem Ontario.

The rnodel will illustrate the optimal choices of self-supplied extraction, municipal extraction

and onsite disposal to maximize the present vdue of benefits from an integrated management

of groundwater quality and quantity.

4.1.1 Outline of the Chapter

The next section (4.2) of this chapter describes the study area, the ernpirical data and

necessary assumptions about hydrology and costs. The study area is the Southwestern

Ontario township of Wilmot, where agricultural activities and municipal water supply

interests have come into conflict. Section 4.3 States Wilrnot's groundwater management

problem in terms of the integrated model developed in Chapter 3. Section 4-4 presents the

results of the integrated model for Wilmot. (Throughout this chapter the term integrated

model will be used to refer to the integrated quality-quantity management mode1 developed

in Chapter 3). A sensitivity analysis is applied to examine the effect of different assumptions

about hydro-geologicd parameters, pumping and treaûnent cost functions, and benefit

functions. The sensitivity of the model is discussed with respect to changes in selected

exogenous variables and parameters.

4.2 Study Area

The Regional Municipality of Waterloo's popdation has grown by over 3% annually

over the past two decades. This growth has increased the demand for groundwater supplied

by self-supplied weIls and municipal water systems.' For exarnple, between 1986 and 1996

more than 2000 water wells were constmcted within the region (CH2M Gore and Stome Ltd,

1996). Many of these are found in traditiondy agricultural areas. The Regional Municipality

of Waterloo is also charactexized by a strong agricultural economy supported by using

organic and inorganic ferùlizers. Given these differences, it seems that an integrated

approach may help in understanding the conflicts and potentid resolutions.

As shown in Chapter 3, an integrated approach requires data descnbing economic

values, iand-use practices, hydro-geology, and water consumption of the study region- The

goaI of the analysis is to establish a causal relationship between groundwater quality and

activities at the surface, or between groundwater quantity and withdrawals at the surface.

The model assumes that the groundwater basin is disconnected from other aquifers.

Many of Ontario's aquifer systems are not closed or single cet1 systems (GRIC, 1979 and

MacRitchie et aL, 1994) and are therefore not suitable for applying the integrated model. One

study by Grand River Implementation Cornmittee (1979) identifies at least eight separate

aquifers within the Grand River groundwater drainage basin. One of these aquifers is in the

township of Wilmot in the Regiond Municipality of Waterloo.

Wiimot Township (See Figure 4.1) is primarily an agicultural area located West of

l Persona1 communication with Mike Murray. Manager Water Services Division. Regional
Municipaiity of Waterloo, October 14, 1998-
the Kitchener-Waterloo urban centre of approxirnately 267,000 people. Wilmot Township

comprises one srnall town (New Hamburg) and several villages that include Baden, New

Dundee and St, Agatha.

Wilmot residences that are not connected to Wilmot Township's water distribution

system use self-supplied wells.' In 1976 there were 148 self-supplied wells in the township

(GRIC, 1979). An estimate of the number of self-supplied wells in 1997 was not available

from the OME. Using an annual growth rate of 2.5% for the perïod 1979 to 1997, it was

estimated that by 1997 the number had amount had grown to 300 wells.

The Regional Municipality of Waterloo supplies water for al1 municipal water

connections in Wilmot Township primarily with groundwater from the Wilrnot aquifer. This

system supplied water to 2,370 househoIds, farms and businesses in Wilmot Township.

representing a total population of approximately 6,500 in 1997 (RMW, 1996a) .

The Regional Municipality of Waterloo extracts, treats and then wholesales water to

the cities and townships of the regional municipality, which in tum sel1 it to customers. Thus,

Wilmot Township (which operates the local distribution system) buys water from the

Regional Municipality of Waterloo, and distributes it at cost to the 2,370 customers.

The Wilmot aquifer is also an important supplier of water to the larger Regional

Municipality of Waterloo, which has responsibility for supplying water to Kitchener-

Waterloo, Cambridge, North Dumf'ries, Woolwich Township, and Wellesley Township (see

Figure 4.1). Water fiom the Wilmot aquifer is used to supplement water supplies in the larger

Residences in Mannheim, a village on the periphery of Wilmot Township, are connected to

another municipai water grid outside of the township.
Figure 4.1 Map of Regional Municipality of Waterloo
W ithin Southwestern Ontario

Source: Simpson (1998)

crop cultivation and livestock fanning. Manure from livestock operations is comrnonly used

to feailize farm land, and mineral ferùlizers on crop fields in the area threaten groundwater

qudity. In 1996 an environmentd assessrnent study of wells in Wilmot Township cited

elevate levels of nitrate at or near Ontario drinking water objective of 10 mg N/L as an

important concern (RMW,1996). Also, research by Terraqua Investigations Ltd (1995)

shows that nitrate levels in WiImot range from close to zero to 17 mg N/L. In response to the

increasing trends, in A p d 1998 the Region of Waterloo initiated the Rurai Water Quality

Program to offer financial compensation to farmers in prionty areas that voluntarily use

practices that improve water quaIity (RMW, 1998).

To summarize, groundwater management in Wilmot Township expenences both

groundwater quantity (extraction) and water quality (allocation) challenges. The integrated

mode1 will be used to illustrate how the optimal levels of extraction and quaiity management

can be determined.

4.3 The Aquifer Problem Revisited

Given an aquifer that is used for groundwater extraction and on onsite disposal

services, the management goal is to determine the allocation that maximizes the net present

value of economic benefits of services provided by the aquifer over the given planning

horizon. The mathematical statement of this problem was first presented in equation 3.12

of Chapter 3. Equation 4.1 restates the Lagrangian function to be maxirnized:

where w,r O and ilr, ;lO.

The notation used in the above equation is the same as that given in the previous

chapter. This notation is summarized here for easy referencing:

- g, c, are benefit and cost functions respectively, in period t,

- w, and Jr, are rates of groundwater extraction and onsite disposal, respectively,

- p, rn and d are superscripts refemng to pnvately supplied extraction, municipal

extraction, and onsite disposal activities respectively,

- N is the number of privately self-supplied extractors,

- x, is the stock of groundwater in the aquifer,

- r, is the rate of groundwater recharge in period t,

- p is the discount factor, and

- v,,, is the function representing the value of the aquifer in period t t l .

The data requirements for solving the problem are summarized in Table 4.1 and are

discussed in greater detail in the rest of this section.

4.3.1 Extractive Groundwater Users

The empirical application in this chapter assumes that extractive users of groundwater

in Wiiinot Township are grouped into two general categories: self-supplied users (identified
1 Table 4.1 Data Requirements For Optimization 1
1 Category 1 Benefit Function 1 Cost Funetion 1
Municipal
Extractor I1 Demand function for municipal
customers 1 (a) variable treatment cost for
nitrate contamination
(b) variable cost of pumping. %
1
Self-supplied Individual demand functions for (a) variable treatment cost for
Extractor representative extractors nitrate contamination
(b) variable cost of pumping

Non-extractive Benefit fûnction for onsite waste External cost function for onsite
user disposal disposa1 (assumed equivalent to
variable treatment cost)

by superscript p) and municipal users (identified by superscript m). The self-supplied

category consists of rurai residences and agricdtura.1operations that are not comected to the

municipal water system. In generd, self-suppIied extractors have similar water demand and

cost functions and, consequently, can be considered identical to one another. Thus, the total

amount of water extracted by self-supplied extractors in time t is Nw?.

In contrast, the municipal water system is a large scale suppIier of water to a non-

homogeneous clientele that includes residences, industrial and commercial establishments.

As, the Regional Municipality of Waterloo is the only municipal extractor,' the total

municipal extraction is written wIm.

Total demand for potable water is defined as the quantity of water drawn from the

municipal system plus extracted from self-supplied wells expressed in cubic metres per year

The Regional Municipality of Waterloo is not the only large scale extractor of goundutater.
However, there are only a few other large scale extractors whose combined pennitted extractions are onIy a
fnction of the permitted extractions of the RegionaI Municipality of Waterloo.
(m3/yr).Generally, dernand is a function of own pnce, income and population? The mode1

assumes linear inverse demand fùnctions based on an own pnce elasticity of -0.569 estimated

by Renzetti and Dupont (1997).

Wilmot Township Public Works Department provided data on prices and municipal

water intake. Based on the long term strategic plan for supplying water to the Regional

Municipality of Waterloo, as described in CH2M Gore and Stome Ltd (1996), it was

estimated that 50% of the volume of wrter extracted by the Regionai Municipality of

Waterloo from the Wilmot aquifer was exported to other cities within the regional

municipality. This exported amount was added to quantity of municipai water dernanded in

Wilmot Township were used as municipal extraction from the Wilmot aquifer. The gross

benefit functions of groundwater extraction are the integraIs of the inverse demand functions

(see Table 4.3 for details).

4.3.2 Non-Extractive Groundwater Users

Agricultural activity in Wilmot Township has been blamed for groundwater

contamination? A class environmental assessrnent study by Regional Municipality of

Waterloo cited the increased concentration of nitrates close to the Ontario Drinking Water

Objectives threshold as one of the motivations for finding new groundwater sources in the

Wilmot Township region (RMW, 1996).

4
The self-supplied demand function for water grows at the rate of p, = (1 + growth rate)'", and
the municipal demand function grows at the rate of.,p These serve as a shifters o f the demand functions.

See the Rural Water Quality Rogram pamphlet descnbing a voluntary cost share program that
encourages farmers to reduce nutrient residuals. Also, see Murray (1995).
 To surnmarize the discussion in Chapter 3, non-extractive benefits are a function of

the assimilative capacity of the aquifer to accept waste from the crop fertilization process and

the cost of alternative activities. The margind cost avoided by using the aquifer for waste

assimilation is the profit that farmer in Wimot would forgo if he/she could not legally rely

on the assimilation function of the aquifer. The quantitative relationship between the

foregone profits and the avoidance of onsite disposal is the marginal abatement cost function

for water quaiity protection (section 3.2). Thus, it is appropnate to refer to the marginal

abatement cost function as the marginal cost-nvoidedfirnction for onsite disposal by the

farming cornmunity in Wilmot Township.

Using the CENTURY soi1 management prograrn, Yiridoe (1997) estimated a series

of cost-avoided functions for onsite disposal by simulating relationships between farm

revenues (net of fertilizer cost), crop type, farming system choice, crop rotation, various

levels leachate production for southwestern Ontario. The simulation data for onsite disposal

from Yiridoe's results were then regressed on forgone agricultural revenue to find a marginal

cost-avoided function for on site disposa1 expressed as

gd(q) = 165.044 -7.196Jr (4.5)

where gd(@)is the private cost-avoided due to onsite disposal to the f m e r and Jr is the level

onsite-disposai measured as kiiograms of ~eachate/ha,year.~

The number of hectares of agricultural land producing onsite disposd that may affect

water quality in the Wilmot aquifer is given by E ~ It

. is assumed that this is approximately

The data from Yiridoe's thesis and the regession results are presented in Appendix C. The
regression had an R squared of 0.601 and a standard error of of 2.394.
50% of the surface area of Wilmot ~ o w n s h i p .In~ terms of the integrated model, onsite

disposal on each hectare of land produces a benefit of Gd(*),

where Gdis the d e f i t e integral

of the marginal cost-avoided function. The total cost-avoided then becomes E ~ - G ~ ( ~ ) .

4-33 Cost of Pumping and Treating Water

The variable cost of suppiyhg 1 m3of potable water is deterrnined by an additive cost

function comprishg two components: pumping costs related ta water extraction, and water

treatment costs (Table 4-1). An initia1 statement of the cost function was given in Chapter

3 as c(x,*)w! Thus, for a given level of groundwater stock, x, there is a fixed marginal cost

of extraction, and for a given tevel of onsite site disposal, q, there is a constant marginal

cost of treating groundwater. The details of the two components are discussed below.

4.3.3.I Variable Pumping Cost

The variable cost of extracting water is deterrnined by the cost of energy required to

pump water from the water level in the well to the surface. Following the notation introduced

in Chapter 3, the cost of energy to pump 1 m3of water fiom the water level in the well to the

surface be given by c(x, ), where x,is the stock of water in the aquifer at time t. However, in

Chapter 3 and in many other groundwater models, the stock of water (x,) is used as a

substitute for the vertical lift because of the direct relationship between stock reduction and

the increase in vertical Iift. In the empirical rnodel, there is no need for the substitution. Thus,

' The Regionai Municipality of Waterloo has the ability to summarize this information, however. at
the time of writing this information couId not be collated.

nie assumption of constant retums to scale is supponed by the literature. e.g.. Gisser and Sanchez
(1980) and regionai water professionals, e-g., Murray, personai communication, 1997).
the pumping cost function uses vertical lift, which is separated into two components. One

component is the lift caused by the drawdown of the water table from another well's cone

of depression, DG. The other component is the lift representing the distance from the suiface

to the static level of water in the well, L, (recall Figure 2.1 in Chapter 2). Thus the vertical

iifi is the the term L, + D4.

Variable extraction cost can then be defined as follows:

where the following notation is used:

PC( - the marginal cost (in dollars per m3) of pumping a unit of water to the surface in

penod t,

the marginal cost (in dollars per m3) of energy to lift a unit of water over a vertical

distance of 1 rnetre,

the vertical distance, in metres, fiom the static level of the water table to the pound

surface over which water must be pumped, and

D e - the vertical effect of the cone of depression (drawdown) in metres in well j.

Drawdown ( ~ 4 is~ itself

) a functional relationship that depends on the rate of

extraction and a number of hydrological variables (Driscoll, 1986).The drawdown within

a well caused by its own rate of extraction is calculated using a modified nonequilibnum
equation as f o ~ o w s : ~

where Ta is the aquifer's transmis~ivity,'~

S is the storage coefficient, r is the minimum

length of 1engt.hof pumping in days required for testing the sustainable yield of the aquifer,

wj is the annual extraction rate in well j, and d is the distance in metres, which is assumed

to be 1 rnetre from the well.

H a well affected by interference, the drawdown is a fimction of the rate of extraction

in the well where the drawdown is initiated. Let w,' be the rate of extraction from well j in

m3 per day, and w,' be the the rate of extraction in m3per day of any adjacent well where

drawdown is initiated. The distance from well i to well j is dlQmetres. Then the drawdown

occuning in well j is calculated with the equation

Al1 other symbols remain as defined before.

The rnodified nonequilibrium equation is a hydrological tool used to determine how the water
table wou1d respond over tirne and space to varyïng rates of extraction, under given hydrological
conditions. See DriscoIl(1986) and Freeze and Cherry (1979) for an extensive treatment of this topic.

'O TransmissiMty is the rate of flow in m3 per day per m of aquifer cross section. The coefficient
of storage is the volume of water the aquifer releases from or takes into storage per unit surface area of the
aquifer per unit change in head @riscoll, 1986).
 In the model presented, the only drawdown effects considered are the drawdown

effects of municipal extractors on thernselves and on self-supplied welis. For example, using

the modified nonequilibrium equation a residential pump extracting groundwater at the rate

of 50 m3per day, under hydrological conditions in the model, would increase the vertical lift

by only 0.06 of a metre, and the increased pumping lift on a neighbounng well only 20

metres away would be a negligible 0.037 m. Thus only a large scde extractor, such as the

municipal extractor, would produce a draw down capable of affecthg another well over 100

metres away."

4.3.3.2 Cost of Treafrnent

The mode1 in Chapter 3 referred to onsite disposal as the assimilation of excess

nutrients. In this empincal application, onsite disposal is represented by nitrates leached from

the root zone- Nitrate contamination is one of the main side effects of contemporary

agriculturd activities (Addiscott et al., 1991, and Hallberg, 1989).

As a result, treating water for nitrate contamination has become an important

concern arnong municipal water suppliers and self-supplied groundwater users (Kenny and

Follett, 1991 and Oneil and Raucher, 199 1). The prirnary concern is the health threat that

high levels of nitrate present. Nitrates ingested by infants and young farm animals c m lead

to human mortality if it combines with the blood's haemoglobin to prevent nomal breathing.

While nitrate contamination is a threat in the Wilmot aquifer (RMW, 1996), no treatment of

water for nitrate contamination is currently being done.

'' Personal communication with G.W. Tomlinson (1998), Senior Environmenrd Officer, OME, West
Central Region-
 The generally accepted rernedies available to a community that faces a nitrate

contamination problem include the following three alternatives: (a) develop a new water

supply, @) consmict a blending facility to decrease concentration or (c) treat the existing

supply (Brown, 1995). In Ontario, municipal suppliers concemed about nitrate contamination

have circumvented the problern by developing new groundwater supplies (CH2M Gore and

Stome Ltd., 1996)-

Developing a new groundwater supply requires that the municipality study the water

yielding capability of the underlying rocks and perfonning extensive environmental

assessments of the new wells' effects on the neighbouring pnvate wells, water courses and

physical structures. Most significantiy, developing a new water supply is feasible only if an

uncontaminated groundwater supply exists sornewhere. The expanding municipal demand

for water occurs at the cost of increasing conflicts with rural activities, such as agriculture.

For example, the Regional Municipality of Waterloo will be unable to rely on new surface

water sources because of previous cornmitrnents not to divert surface water for municipal

consumption (CH2M Gore and Storrie Ltd., 1996, and RMW, 1996). As this cornmirment

is respected, the Region must seek new ways to deal with the groundwater pollution problem

through well head protection activities, emissions trading proposais tightened land zoning

(Murray, 1995), or through treatment of polluted groundwater. Consequently, developing

new groundwater sources will becorne a progressively expensive alternative.

In the United States, treating existing water supplies is the least costly alternative for

many municipal water supplies (Brown, 1995). There are several processes that are used to
solve the problem of nitrate contamination. They include ion exchange,l2reverse osmosis and

distillation (Nyer, 1992). A split system process that involves treating water, usually with

iron exchange, and combining the treated and untreated water at safe concentrations is

sometimes used (Water Resources Technical Brief, 1991).

Though nitrate remediation technologies differ, the cost of nitrate contamination to

a water supplier generally increases as the concentration of nitrates increases. At the

household level, the nitrate problem can be dealt with through point of use domestic size

nitrate treatment systems. These systems may be high capacity filters, or reverse osrnosis

systems. Ion exchange units may aiso be used but tend to be more expensive.I3 Table 4.2

presents a surnmary of the comparative costs of treating water for nitrate contamination.

Given the array of remedial options and ueatment technologies for addressing the nitrate

problem, there clearly is no standard cost function for water treatment. However, in most

technologies, the cost of treating water for nitrates varies with the nitrate concentration.

Consequently, a marginal treatment cost for nitrates in Wilmot Township was created using

the Ioading of nitrates in the aquifer and the cost of treating water with a residential nitrate

treatment system. This approach provides an oppominity to demonstrate how varying degrees

of groundwater contamination could affect the water treatment cost.

For the purpose of constnicting a marginal nitrate treatment cost function, a

I2 Among Amencan municipalities that obtain most o f their water from aquifers. the process most
often used to remove nitrate from groundwater in the United States is ion exchange (Brown, 1995). In this
process the nitrate contaminateci water is passed through a bed of resin to which nitrate ions are attracted; in
exchange less harmful ions replace nitrogen ions in the water.

l3 Penonai communication, Technicai staff at AFCW Environmental Systerns and Services, 1998.
1 Table 4.2 -
Comparative Water Treatment Costs
Treatment Technology System Acquisition Cost Cost per cubic metre
Municipal Size Ion Exchange $210,000 but depends on Depends on concentration
System nitrate concentration of contaminants and
volume of water treated
Municipal Size Reverse
Osmosis (Approx. 4000
m3/day)
Residential Size Reverse Depends on concentration
Osmosis System of contaminants the
volume of water treated
Residential Filtration Systern $260-$350 Depends of the
concentration of nitrates
and the amount of water
filtered
Note: These cost estirnates were obtained by contacting equipment rnanufacturers.

relationship between the cost of treating one cubic metre and the concentration of nitrate in

groundwater (qC)is established for a domestic nitrate filtration system. Once the equipment

is determined, the main variable cost is that of replacing the spent nitrate removai filters. A

residence faced with a water contamination of 10 mg nitrate per litre would use between two

and four filters per year depending on the amount of water treated.

Only a fraction of residential water needs to be of potable quaiity. It is assumed that

only that proportion of total water used is treated for nitrates. It is assumed that the cost of

this treatment is spread evenly over the total costs of water extracted. For exarnple, if the

total water consumption is 5 10 m3per residence using one nitrate filter annually, the cost per

cubic metre of treated water becornes $6.25 US, but when this is spread over the total

domestic water use the cost of treatment becomes $0.21 US and $0.29 CDN,

As the concentration of nitrates decreases, the cost per unit of water decreases

112
because of the Iengthened filter Me. Conversely, as the nitrate concentration increases, filter

use increases, thereby increasing the cost of water treatment- Using this relationship, the cost

per cubic metre of water is estabiished as a function of the nitrate loading in groundwater per

hectare of land (V):l4

The coefficient was estimated by establishing an algebraic relationship between nitrate

loadings at various intervais from O to 50 mg nitratenitre of water and the annuai cost of

water treatment. Clearly, if the concentration of nitrates is zero there is no treatment cost .

4.3.3.3 The Dynarnics of Nitrate Contamination

The vaiue of qCis determined by the movement of nitrate through the root zone and

eventuaily into the aquifer. The quantity of nitrate transported depends on the amount of

onsite disposd ($), rneasured in kg of nitrogen leached per hectare and the rate of infiltration

(Jury et al., 1991).15If the rate of infiltration and other variables are constant, the amount of

nitrate crossing the aquifer becomes a function of the amount of onsite disposd and the rate

of denitrification.

The movement of Ieachate from the root zone is not an instantaneous process. Its

speed is affected by several factors that have been discussed in detail by Goss et al. (1992).

Water takes time (months or years) to travel from the root zone down to the aquifer,

' Recall from Chapter 3 that the marginal cost of supplying water is an additive function; MTC is
treatment cost component while PCJis the pumping cost component. Thus, MTC + PCj are equivalent to
c(x,,Jrc) in Chapter 3.

l5 The production function for onsite disposai estimated by Yiridoe (1997) was Jr = 10.1 1 - O. 1271
+0.001612where Jr = Kg N per hr, 1= kg nitrogen-N input per hr. But this is not the arnount of nitrate that ends
up in the aquifer.
depending on soil structure (Jury et al., 1991). In the process, some of the nitrate is rendered

harmless by the n a d process of denitrification. Thus, nitrate Ioading observed in the root

zone is a not a good measure of nitrate Ioading at the well head.

The dynamics of nitrates in groundwater are captured by the relationships of three

variables: the amount of onsite disposal in the root zone (Jr, ), the volume of nitrate crossing

), and the cumulative amount of nitrates in the aquifer at any time (~r',).
the water table (NS,

The volume of nitrates crossing the water table has a lagged response to leaching in the root

zone. The nature and length of lag depends on many factors, including the thickness and

texture of soiI mande above the water table, field capacity, soil moisture, the number and size

of structural voids in the soil matrix, the presence of field drainage equipment, and the rate

of denitrification (Jury et al,., 1991, and Hallberg, 1989). Research cited in Hallberg (1989)

shows that depending on various hydro-geologic factors, the time of travel for nitrate to reach

the water table could be a short as one year but could exceed one decade.

Ontario studies specifically exarnining how the travel time of nitrates changes with

each variable have not been found. This study assumes that because the wate; table is

relatively shallow, and structures dlowing rapid subsurface movement are present, it is

reasonable to assume that the travel time for nitrates from leaching in the root zone to

crossing the water table is no less than one year and no more than 2 years.16 Therefore, the

arnount of nitrate crossing the water table in year t is a fraction of leaching occurring in year

t-1. This means that for any year, not enough time would have elapsed to transport the nitrate

l6 The assumption was discussed with Dr. Garry Parkin of the Department of Land Resource Science,
University of Guelph. In a personal interview, Dr. Parkin indicated that while the travel time couId be as short
as one year, it could be several years, though the longer rravel period was less likely.
solute leached in year t across the water table and dl exiting leachate from year t-2 would

have aiready entered the aquifer.

The function representing the relationship between root zone nitrates and nitrates

crossing the water table can be written:

where dr is the decay rate of nitrates during the travel time. For a decay rate of 50%, nitrate

entering the aquifer would be 66.6% of the arnount leached in the previous year.

Nitrate in the aquifer itself decays naturally from various processes, generally referred

to as denitrification, at the rate of dr % per year. The arnount of nitrate camed over from

period t to t + l is the cumulated nitrate times one minus decay rate, qc-(1-dr). Then the

cumulative amount of nitrate in the aquifer c m be expressed in the equation of motion:

Thus, equation 4.8 shows that water quality in the aquifer at any time is determined by a

dynamic process that reflects the amount of past leaching not only in penod t-1 but aiso in

other yean and the rate of denitrification that is captured by dr. (Recdl that the value of fi

is used to determine the marginal cost of treating water in equation 4.6). For dr = 0.5, a

leaching of 15.2 kg N per ha would substantiaUy elevate nitrate loading in the aquifer but this

loading would faU to 1.7 mg/L of water within 4 years. However, if dr is made smaller, e-g.

0.1, nitrate in the aquifer afier 4 years would be 7.5 mgL.These relationships depend on a
given rate of infdtration from the leaching zone to the aquifer. Thus, the rate of leaching in

kg Nha can be translated to a water quality loading in mg N/L within the aquifer.

With a value of dr at 0.5 in this model, a persistent rate of leaching at 15.2 kg N per

hectare over several years would maintain the cumulative arnount of nitrate, qC,at a water
quality exceeds Health Canada's dnnking water quality guideline of 10 mg nitrate nitrogen

per litre of groundwater (see Figure 4.2).

Figure 4.2

Relationship Between Onsite Disposal

And Water Quality ln Aquifer

J
70
1 60
-Dr=0.5
i

f !
I

t i
l
I
I
t

O 5 10 15 20
Onsite disposal kg Nkectare

4.3.4 Fixed Costs

Fixed costs are associated with the pumping, treatment, and distribution of

groundwater. The fixed costs of water distribution are the cost of the water pipelines that

convey water from the point of water extraction to the point of use. These costs are not

included in the integrated model.

 The fixed pumping costs are the capital costs of equipment and facilities for
extracting water. Like disuibution costs, h e d pumping costs are established at the time of

the construction of the system and include the annual maintenance cost. The Regional

Municipality of Waterloo recovers this cost at the rate of $0.43 per m3, which is passed on

in the water charges applied by Wilmot ~ o w n s h i ~This

' ? fmed charge is incorporated in the

model. The fixed cost of water treatment is assumed to be arnortized in the per unit cost

nitrate treatment defined in equation 4.7.

4.4 Hydro-geology of Wilmot Area

Wilmot Township and its surroundings are a part of the mainly flat Great Lakes

Lowlands. The land surface slopes very gentiy to the south-west and has an average height

of about 335 m above sea level (GRIC, 1979). Surficial geology consists mainly of

sedimentary materials (sand, gravel and undifferentiated till). Bedrock material consists of

dolomite, limestone, shale, and evaporites (MacRitchie et al., 1994).

The stratigraphy of Southwestern Ontario, including Wilmot Township, is extremely

complex. The details will not be explained here. However, MacRitchie et al. (1994) and

GRIC (1979) provide details of the complexity of the geology. The aquifer chat is the subject

of the empirical application is a combination of overburden and bedrock aquifers. The

overburden consists of layers of sand and gravel, separated by clay and clay till. Together,

these layers provide numerous aquifers, some of which may be as shallow as 5 metres and

l7 Water pricing and demand data were provided by the Public Works Depanment of the Township
of Wilmot.
othen as thick as 110 metres. These glacial deposits lie directly above bedrock aquifers that

extend for additional tens of metres-

Wells are drilled in the bedrock within a few metres of the bedrock or high above

the bedrock in the overburden, and yield between 0.04 rn3and 2.7 m3per minute (MacRitchie

et al., 1994). Because the overburden is often not overlain by an aquitard (protective layer

of impermeable material) the overburden aquifer is vulnerable to nitrate contamination from

agricuftural activities at the surface. The bedrock aquifer is less vulnerable to pollution as it

is overlain by an aquitard that protects the lower aquifer from percolating contarninated

water. However, water quality in the bedrock aquifer is variable ranging from fair to hard

depending on the arnount of totally dissolved solids in bed-rock water.

In some wells, the depth from the surface to the static water table level may be as

little as 3 m, while in others it may be a deep as 42 m (GRIC, 1979). In this study, the initial

average depth to the water table in Wilmot Township is assumed to be 22 metres. From

senes of geologic cross sections of the region produced by the Grand River Implementation

Cornmittee, it was detennined that the average distance from the surface to the bedrock was

107 m (GRIC, 1979). Thus, the initial height of water in overburden aquifers is assumed to

be 85 metres.

Given the variation in the depth of water bearing bedrock, an average depth of 20

metres below the surface of the bedrock was established as the bottom of the aquifer. By

using this approach, the complexity of the region is simplified in the manner presented in

Figure 4.3. The entire depth of the aquifer is 105 rnetres and the distance to the water table

from the surface is 22 metres.

 Figure 4 3 Simplified Representation of Wilrnot Aquifer

Ground Surface
Radius
3.5 km
- initial

1
l
1 1
I I
I I
I I

Thickness of I
I
overburden 1 hitial
107m thickness of
I
1 aquifer
I
I
I
'I 105111
I
I 1

I I
I I
I 1
hickness I
I

a
I
v
Bottom of Aquifer

Hydro-geologic parameters in the aquifer may aiso Vary spatially. For example,

because of structural fractures in bedrock, hydrarrlic condrrcrivity may be relatively high (8.6

m3/day/m2)in the upper reaches of the bedrock aquifer. However, hydraulic conductivity

decreases dramatically as the depth increases (MacRitchie et al., 1994). The hydraulic

conductivity in the overburden has been estimated to be within the range from 8.6 m3/day/m'

to 82 m3/day/m2. Given the range of hydraulic conductivities in the overburden and the

bedrock, the average of the range (45.3 m3/day/m2) was taken to be the hydraulic
conductivity of the entire aquifer.

The measure of hydraulic conductivity is important because it determines the rate at

which water moves throiigh the aquifer and is a pnmary factor in determining the shape and

the radius and depth of cones of depression (Freeze and Cherry, 1979). The product of the

hydraulic conductivity of the aquifer and the aquifer thickness (from the bottom of the

aquifer to the static water table level) is the transmissivity rate of the aquifer. Aquifers with

high transmissivities are associated with wide but shalIow cones of depression. The

transmissivity of the Wiimot aquifer is relatively high at 4756 m3/day/m'.

Further, because of the variation in water bearing rnaterials, each with its diffenng

ability to store water, the coefficient of storage (or storativity) may vary throughout the

aquifer. In unconfined aquifers, finer grained materials wouId have a coefficient of storage

of about O. 1but in coarse grained materials the coefficient of storage is close to 0.3 (Dirscoll,

1979). Given the presence of both fine and coarse grained materials in the overburden and

the bedrock of Wilmot Township an average coefficient of storage of 0.15 was chosen for

the entire aquifer.

The recharge rate of the aquifer is determined by the precipitation rate, the rate at

which water flows through the unsaturated material at the surface, surface ninoff and

evapotranspiration. Precipitation is within the range from 76.2 cm to 119 cm per annum. But

actual groundwater recharge in the Great M e s Lowlands may range between 1.2 cm and 15

cm per year (MacRitchie et al., 1994). At this rate, the aquifer would be replenished between

0.46 and 5.7 million cubic metres per year. While some of this precipitation recharges the

aquifer, the greater portion is channelled to streams that flow to the great lakes. It is assumed
that the recharge rate of the Wilmot aquifer is 1.25 million cubic metres per year.

4.4.1 Groundwater Stock Equation of Motion

The equation of motion presented in Chapter 3 is:

where x,, w,, and r, are expressed in m3. These are expressed in vertical equivalents to be

consistent with the treatment groundwater stock in section 4.3.3.1. Since the area of the

entire aquifer is known, any arnount of water extracted from the aquifer c m be can be

expressed as a vertical equivalent in metres of the aquifer withdrawn.

Let the total volume of the water bearing matenai of the Wilmot aquifer be given by

AQV m3.Given the assurned radius of 3.5 km, the area of the aquifer is 38.48 km'or 38.48

million m'. So the vertical extent of the aquifer is AQV/area which is 127 m. However, since

the storage coefficient (SC) of the material is 0.15, the vertical equivdent the water carrying

capacity of the Wilmot aquifer is AQV/(AREA-SC) and the vertical equivalent of 1 m3 of

water is l/(AREA*SC)metres of the aquifer or 2.22 xlo".

While the stock dynamic equation (equation 4.9) represents the state of aquifer stock

at any tirne, a dynamic equation that represents the level of the water table in the aquifer and

the resulting purnping Iift must also be stated. Between any two penods, Say t and t+l, the

average water table level is the mean vertical equivalent of water stock. This is expressed:

(x, + x,, J 2-AREA-SC (4.1O)

 Now, let LJ represent the initial lift in the aquifer and let HI be the initial level of the

water table, then by extending the relationslip in the previous paragraph, the average Iift

from the ground surface to the static level of the water table referred to as L, would be
captured by the equation:

4.1 1

The level of Iift is endogenously determined in the mode1 and this is used to determine the

part of the pumping cost per unit of water. Table 4.3 sumarizes the hydrological
assumptions used.

1 Table 4.3 Hydrological Data Used In The Integrated Mode1

Area of aquifer = 38.48 km2
Storativity = 0.15
Transrnisivity = 1250 cubic rn per day
Distance measurement for weli interference (dij) = 300 rn
Initial depth of water table from ground surface = 22 m
Initial thickness of aquifer = 105 m

The socially optimal solution is obtained by solving equation 4.1 using the detailed
equations given in equations 4.2 to 4.12. The values of coefficients used are summarized in

Table 4.4.

Generd Algebraic Modelling System (GAMS) cornputer software was used for

finding the levels of activities in the socially optimal outcome. The code for the program is

122
 Table 4.4 Explanation Of Functions and Coefficients Used in
Base Solution of the Integrated Mode1
1 Expression
Gross benefit of private extraction =
N[2.5368wP - 0.003246(~~)~/2]
Gross benefit of municipal extraction =
2.5368wP - 0.0000 121(wm)'/2]
Gross benefit of onsite disposal =
165.044Jr -7.196v/2
Total Pumping Cost =
PC P.(& +dr)wP
Total Variable Treatrnent Cost =
0.0 1455 qC,
Notes
N = 300, number of self-supplied wells
2.5368 = intercept; 0.003246 = coefficient
WP = self-supplied groundwater extraction
(m3/year)
Sources: Renzetti and Dupont (1997) and
Tate and Lacelle ( 1995)
2-5368 = intercept; 0.00000 121 = coefficient
wm= municipal groundwater extraction
year)
(in3/
Sources: Renzetti and Dupont (1997) and
Wilmot Township (pers. corn.)
- - --
Ed = agricultural land producing onsite
disposal, 1924 hectares
165.286 = constant
7.196 = coefficient
$ = onsite disposai, kg nitrogedha
Source of data: Yiiridoe (1997)
PC = self-supplied margind cost of
purnping 1 m3over vertical distance of 1m.
$0.0007.
PC = municipal marginal cost of pumping
1 m3 over vertical distance of lm, $0.0007.
Source: Provencher and Burt (1994)
& + Dd, = total vertical distance (static water
table distance and effect of cone of
depression respectively). Endogenously
determined.
0.0 1455 = coefficient,
qC,= cumulative amount of nitrate in
groundwater per hectare of land.
Endogenously determîned.
Source: extrapolation based on data from
AFCW Environmental Systerns Services
presented in Appendix D. Ln order to respect the GAMS grarnmar convention, the variable

narnes and parameters are sometimes named differently. However, the notation and

documentation within the program wil1 prevent ambiguity.

Base results were obtained for a 50 year planning horizon. Specimng other planning

horizons above 50 years resulted in small differences between the optimal level of

groundwater extraction (less than 1.4% in al1 cases). This indicates that choice of planning

horizon was not an important factor in results. However, the response of total extraction was

consistent with the expectation that a more lengthy planning horizon would result in a slower

rate of groundwater stock depletion. For example, Figure 4.4 shows that the optimal stock

of groundwater was very similar under planning horizons of 50, 100 and 200 years.18

Figure 4.4
Sensitivity of Groundwater Stock
To Changes in Planning Horizon

200 years 100 years 50 years

Legend: Planning horizon

l8 It was not possible to program planning horizons of much longer than 200 years because of the
iteration constraints on the GAMS program However, based on the observed trend longer horizons were
associated with lower annuai rates of groundwater extraction and onsite disposal.
 The socially optimal solutions for the mode1 are frst presented. These results are

compared with the results obtained under four groundwater management approaches

characterized by different institutional arrangements pertaining to onsite disposai

groundwater extraction. Alternative management approaches considered are

1. Qudity focussed approach

2. Quantity focussed approach

3. Separate qudity and quantity management approach, and

4. Common pool approach.

The purpose of the cornparing the optimal results with these management approaches is

mainly to demonstrate how an integrated approach can be used in analysing groundwater

management policy in Wilmot Township. However, given the data limitations regarding the

extemal costs of onsite disposal, the results do not cany conclusive policy implications for

of groundwater management in Wilmot Township.

4.5.1 Optimal Solution

The optimal solution represents the regime that yields the highest present value for

benefits from groundwater extraction and onsite disposal. Table 4.5 shows that over the 50

year planning horizon, the net present value of al1 activities using the aquifer is $62.89

million. The benefits are allocated between self-supplied extraction (2.5%), municipal

extraction (22.0%), and agricultural cost avoidance (75.6%);refer to last row of Table 4.5.

The optimal time paths of groundwater stock, extraction, onsite disposal and water

table depth are summarized in Table 4.6. Because of the assumption that there is no pnor
 Table 4.5 Net Present Value of Annual Benefits To Users of Wilmot Aquifer
Socially Optimal Outcome
Year Self-suppliedextraction Municipal extraction Agricultural Cost Avoided Total
Annual
Benefits $ Percentage Benefits $ Percentage Benefits $ Percentage Benefits $
annual total annual total annual total

1
5
10
15
20
25
30
35
40
45
50

Total
 Table 4.6 Socially Optimal Time Path of Stock and Decision Variables

Year Groundwater Self- Municipal Total Onsite Depth of

stock supplied extraction groundwater disposal water table
million extraction million extraction kg nitrate
cu.m./yr cu.m./yr cu.m./yr million cu.m./yr per year metres

1
5
10
15
20
25
30
35
40
45
50
Annual
Average
accumulation of nitrates in the aquifer at the start of the planning period, the cost of water

is relatively inexpensive and the model solves for a high raie of extra~tion.'~
After about five

years, the quantity of nitrates approaches a steady state and the level of self-supplied

withdrawal stabilizes at about 460 cubic metres per year and at about 1.236 million cubic

metres for municipal extraction. Notice, however, that the level of extraction in the fiat few

years is much higher as the concentration of nitrate in groundwater takes some time to build.

The sharp increase in onsite disposai in the 5 0 year

~ occurs because the lagged onsite

disposal occumng in that year does not affect extractive benefits in the planning horizon.

Hence, private benefits h m onsite disposal are maxirnized.

The joint cost of extraction and treatment is affected by level of lift (the depth of

water table) and the loading of nitrate. The level of the water table falls only by 1.2 metres

over the entire planning horizon. This would increase the marginai pumping cost of

groundwater in the region by about 17.5 cents for every 100 cubic metres of water extracted.

On the other hand, the marginal cost of groundwater treatrnent increases by over 50 cents

because the of the Ievel of onsite disposal, which stabilizes at about 20.5 kg nitrate nitrogen

per hectare per year (Nhalyear) afrer the Sb year in the planning horizon. Appendix E

summarizes the marginal pumping costs and water treatment costs of the five management

scenarios

l9 Unlike the level of onsite disposal, the cumulative level of extraction does not reach a steady swte.
The Ministry of Environment has no policy that requires a steady state. An environmental constraint that
restricts the maximum depth of the water table to 30 rnetres is not binding-

" The variable cost of pumping is very srnall, due to the minimal power cost associated with
groundwater pumping. The cost of treatrnent is varies under different management policies. This points to a
need for more accurate data about the rnargind cost of treating water for nitrate contamination. Further
research did not produce better estirnates of the nitrate treatment function for groundwater.
4.5.2 Non-Optimal Solutions

Aquifer management as represented by the socially optimal solution from the

integrated approach is not pursued in Wilmot Township. To get a sense of the difference in

benefits caused by non-optimal institutional arrangements, the study compares four

alternatives: cornmon pool approach, quantity management focus, quality management focus,

and a separate management. The assumptions of each of these results of these approaches are

first discussed and the results are summarized.

4.5.2.1 Common pool approach

The prograrn was adapted to obtain the outcome under comrnon pool institutional

arrangements. As discussed in Chapter 3, a cornmon pool approach is one that dlows

individuds engaged in the famiing activities and groundwater extraction activities to use the

aquifer without having to consider the effect of their actions on other aquifer users. It is

assumed that farrners in Wilmot Township operate at the point where the marginal private

benefit of onsite disposai is zero.

Extracton are assumed to extract at the rates where marginal private cost is equal to

marginal pnvate benefit? Based on the results some groundwater extraction models, the

absence of property nghts to stocks of groundwater may cause comrnon pool withdrawals

to exceed optimal withdrawals (Feineman and Knapp, 1983).

Table 4.7 presents the results of the mode1 under a common pool assumption. The

'l The mathematical mode1 presented in Chapter 3 allows for the f m e r or extractor to operate
where the pnvate intertemporal user cost (right hand side o f equations 3.4, 3.8 and 3.1 1). is non-zero. This
would be the case if the farmer or extractor anticipates a private benefit from reducing fertiIization or
extraction. However, there is no firm evidence that future benefits are considercd in extraction and
fertilization decisions under Ontario's current institutional arrangements.
 Table 4.7 Net Present Value of Annual Benefits To Users of Wilmot Aquifer
Common Pool Outcome
Year Self-supplied extraction Municipal extraction Agricultural Cost Avoided Total
Annual
Benefits $ Percentage Benefits $ Percentage Benefits $ Percentage Benefits $
annual total annual total annual total

1
5
10
15
20
25
30
35
40
45
50 .

Total
net present value of extraction and onsite disposd activities is $62.3 million dollars, and is

distributed among self-suppiied extraction (2.3%),municipal extraction (20.3%), and onsite

disposal (76.5%). Common pool arrangements yield only a 0.9% smaller net present value

of economic benefits than the optimal outcome.

The optimal t h e paths of groundwater stock, extraction, onsite disposal and water

table depth are summarized in Table 4.8. The level of self-supplied extraction stabilizes at

approximately 438 cubic metres per year after 10 years. Municipal extractions stabilize at

approximately 1.2 million cubic metres. The combined groundwater extraction in the model

stabilizes at 1-31 million cubic metres per year.

Probably the most surprising result from the common pool outcorne is the fact that

the water table is doser to the surface (22.7 metres) than the water table in the social

optimum (23.2 metres). This corresponds with a higher total rate of extraction under the

optimal approach (stabilized at about 1.37 cubic metres) as opposed to 1.3 1 million cubic

metres under the common pool institutional arrangements. In most rnodels of optimal

groundwater extraction, the depth of the water under the optimal outcome is less than the

common pool depth (e.g., Feinexman and Knapp, 1983, Gisser and Sanchez, 1981 and

Provencher and Burt, 1994). The explanation for the difference in this model is the fact that

the benefits of agricultural abatement cost avoided are considered. Onsite disposal provides

an incentive for reduced extraction while providing savings greater than the foregone benefits

to extractors.
I Year
Table 4.8 Common Pool Time Path of Stock and Decision Variables

Groundwater Self- Municipal Tot al Onsite Depth of

I
stock supplied extraction groundwater disposal water table
million extraction million extraction kg nitrate
cu.m./yr CU. m./yr cu.m./yr million cu.m./yr per year metres

1 Average 1 n.a. 446.6 1.201 1.335 22.9 n.a.

452.2 Qualty focussed approach

One option available to groundwater quality managers in Wilmot is to control the

level of onsite disposal through various well head protection plans. Murray (1995) has

indicated that the Regional Municipality of Waterloo will consider source prohibitions as

well design and operating standards supported by new regulations for the protection

groundwater quality. Assume that the municipality implements a program to limit nitrate

leaching to no more than 15 kg nitrate nitrogen hdyear."

Fuaher, assume that the Ontario Ministry of Environment, which is responsible for

groundwater quantity management, does not consider it necessary to restrict the quantity of

groundwater extraction. Under t h i s arrangement, pemiitted and exempted usee would extract

groundwater at the rate where the marginal benefit of extraction is equal to the marginal cost

of extraction plus the marginal cost of treatment. Thus, extractors would behave as though

they were under common pool institutional arrangements.

The above assumptions would constitute a management approach focussing solely

on groundwater quality management without incorporating quantity concerns. Hence. this

approach is termed the quality focussed management approach.

Table 4.9 presents the results when the mode1 is adapted to reflect the quality

focussed management approach. The net present value of al1 activities over the planning

horizon is $60.3 million. Benefits are allocated between self-supplied extraction (3.0%),

municipal extraction (26.8%), and agicultural cost avoidance (70.2%);refer to last row of

~2 Groundwater manages are assumed to know the marginal abaternent cost funciions per hectare of
the agricuItura1 community. A maximum amount of fertilizer per hectare or a precisely nutrient accounting
system would be sufficient to ensure a binding constraint-
 Table 4.9 Net Present Value of Annual Beneflts To Users of Wllmot Aquifer
Quallty Focussed Approach
Year Se If-supplied extraction Municipal extraction Agricultural Cost Avoided Total
Annual
Benefits $ Percentage Benefits $ Percentage Benefits $ Percentage Benefits $
annual total annual total annual total
Table 4.9.

Table 4.10 shows that the Ievei of seIf-supplied extraction stabilizes at 509 cubic

metres per year and municipal extraction stabilizes at 1.38 million cubic metres per year afrer

the 10" year. Because of the higher level of extraction, the depth of the water table at the end

of the planning horizon is 2.5 metres deeper than the initial level. The increased pumping lift

increases the marginal extraction cost, but this is offset by the reduced treatment cost

associated with lowered nitrate leveis.

4.5.2.3 Quantity focussed approach

Assume that, in response to weU interference complaints and to concerns about

protecting base flow for ecosystems at risk, the Ontario Ministry of Environment embarks

on a program to iimit groundwater extraction. This could be done through an annually

adjustable water permit s y ~ t e mSince

. ~ self-supplied extractors are exempt under the Ontario

Water Resources Act, the quantity restriction is applied only to the extraction of municipal

extractors, but self-supplied exuactors are assumed to extract water such that the marginal

pnvate cost is equal to marginal private cost. Also, assume farmers produce onsite disposal

until the net marginal private benefit is zero.

This alternative approach is termed quantity focussed management as it is

characterized by a groundwater agency applying policy prescriptions that relate only to water

extraction. In practice, this policy is rarely pursued in Wilmot Township and the rest of

southern Ontario.

When the Ministry of Environment has done this, it has limited ihe permitteci extractions of recently
permitted extractors before adjusting the pem-ts of permitted extractors-
 As Table 4.1 1 shows, the net present value of al1 activities is $62.15 million

distributed between self-suppiied extraction (2.3%), municipal extraction (20.2%), and

agricultural abatement cost avoidance (77.5).

The time paths of the main decision variables are surnrnarized in Table 4.12. Self-

supplied extraction stabilues at about 438 cubic metres per year, and municipal extraction

stabilizes at about 1 million cubic metres per year. Recall that self-supplied extractors are not

covered under the adjustable permit system. Yet their extraction rate is smaller than the

socially optimal extraction by self-supplied extractors.

Onsite disposal occurs at the rate of 22.9 kg N/hectare/year. This level of onsite

disposal serves a major disincentive for self-supplied extraction which is lower than the

optimal amount, even though there is no constraint on self-supplied extraction.

The quantity focussed approach results in the depth of the water table decreasing to

2 1.3 metres, which is less than its initiai level of 22 metres (Table 4.12). The declining depth

of the water tabIe is caused jointly by the adjustable permit system and the effect of the

common pool institutional arrangement regarding onsite disposal by farms.'"

24
In reaiity, at very shalIow water tabIe depths excess water usually flows to natural discharge
points under the hydraulic gradient,
 Table 4.12 Quantity Focussed Time Path of Stock and Decislon Variables

Year Groundwater Self- Municipal Tot al Onsite Depth of

stock supplied extraction groundwater disposal water table
million extraction million extraction kg nitrate
cu.m.lyr cu.m./yr cu.m./yr million cu.m.lyr per year metres

1 606.1 643.8 1.566 1.759 22.9 22.0

5 605.4 451.3 1.O48 1.183 22.9 22.1
10 605.8 438.9 1.015 1.146 22.9 22.0
15 606.3 438.5 1.014 1.145 22.9 22.0
20 606.9 438.5 1.014 1.145 22.9 21.9
25 607.4 438.6 1.014 1.145 22.9 21.8
30 607.9 438.6 1.014 1.145 22.9 21.7
35 608.4 438.6 1.014 1.145 22.9 21.6
40 609.0 438.6 1.O14 1.145 22.9 21.5
45 609.5 438.6 1.014 1.145 22.9 21.4
50 610.0 438.7 1.014 1.014 22.9 21.3
Annual
Average n.a. 446.8 1.036 1.167 22,9 n.a.
4.5.2.4 Separate quality and quantity management approach

The final potentid management approach considered is a separate nonintegrated

approach involving policies to limit onsite disposal by f m s in Wilmot and as well as to

restrkt the volume of groundwater extraction. Restrictions under the quantity focussed

approach and the quaiity focussed approach are applied. Self-supplied extraction was

assurned to be exempt as before. This management approach is referred to as a separate

approach.

The separate management of groundwater quantity and quaiity assumes that the

quantity restrictions of the Ontario Ministry of Environment are implernented and the nitrate

containment poiicy of the Regional Municipaliry of Waterloo are both implemented but not

as a single integrated economic problem. This policy option, while non currently pursued in

Wilmot, was constructed to retlect the potentiai effects of each agency unilaterally pursing

its own quality or quality objectives.

Under the separate approach, the net present value of benefits from extraction and

cost avoidance is $60.1 million over the 50 year horizon (Table 4.13). The benefits (see Iast

row of Table 4-13),are distributed between self-supplied extraction, municipal extraction,

and abatement cost avoidance in shares of 3%,25.7% and 71.396, respectively.

The levels of extraction and onsite disposal are substantially different (see Table

4.14). Self-supplied extraction, k i n g exempt from annual permit adjustments, st abilizes at

about 509 cubic metres per year. The volume of municipal extraction, stabilizes at 1.2

million cubic metres per year. And, the depth of the water table at the end of the water table

is 23 metres, which indicates that the water table declines by only 1 metre over the planning
 Table 4.13 Net Present Value of Annual Beneflts To Users of Wilmot Aquifer
Separate Approach
Year Self-supplied extraction Municipal extraction Agricultural Cost Avoided Total
Annual
Benefits $ Percentage Benefits $ Percentage Beneflts $ Percentage Benefits $
annual total annual total annual total

Total
horizon.

4.5.3 Distribution of Benefits Under Different Approaches

T'bis section provides a brief swnmary of the size and distribution of benefits between

the three user groups of the aquifer under each management approach. Table 4.15

summarizes the net present value of benefits under the five different management

approaches. The integrated approach is optimal, followed by the cornmon pool approach,

then quantity focussed approach, the quality focussed approach and the separate approach,

respectively.

In Tables 4.16 and 4.17, the differences in the distribution of benefits under the four

non-optimal outcomes are compared with the distributions of benefits under the optimal

solution. The cornmon pool approach results in less than I % redüced benefits compared to

the optimal outcome. This result is surprising since the it would be expected that failing to

control two externalities would exacerbate welfare losses. Instead, comrnon pool institutional

arrangements yield the highest benefits apart from the optimum. However, the distribution

of benefits is substantially different. Extractors are worse off by 7.48% and farmers are better

off by 1.24%.

Compared to the optimal outcome, the quantity focussed approach that targets

groundwater extraction by the municipal extractor only results in a welfare loss of 9.03% to

consumers. Self-supplied extractors and farmers who operate as under a comrnon pool

regime have no incentive to delay consumption and decrease onsite disposal, respectively.

ConsequentIy, the municipal extractor's welfare is reduced below the optimal, but it is not
 Table 4.15 Net Present Values of Five Groundwater Management Approaches

Management Approah Optimal Quantity Quaiiîy Separate Common Pool

Outcarne Focus Focus Management Approach
S S S $ 8

Self-supplied extraction 1,542,200 1,428,341 1,805.1 87 1,805.685 1,426,901

Municipal extradon 13.818,386 12.571.283 16,174,940 15,961,641 12,785.296
Abaternent cost avoided 47.528,l22 48.1 15,409 42,355,770 42,355,770 48.115.409
Total aquifer bendits 62,888,708 62,115,033 60,335,897 60,123.096 62,327,606

Table 4.1 6 Distribution of Benefiis Under Fwe

Groundwater Management Approaches

Management Approah Optimal Qua* Quaiity Separate Cornmon Pool

Outcorne Focus Focus Management Approach

Seif-supplied extraction 2.45% 2.30% 2.99% 3.00% 2.29%

Municipal extraction 21.97% 20.24V0 26.81 % 26.55% 20.51%
Abaternent wst avoided 75.57% 77.46% 70.20% 70-45% 77.20%
Total aquifer b e n s f ï 100.00% 100.00% 100.00% 100.00% 100.00%

Table 4.17 Differences In The Distribution of Benefas

(Each Approach Compared To The Optimal Outcorne)

Optimal Qua- Quality Separate Cornmon Pool

Outwme Focus Focus Management Approach
Self-supplied extraction 0.00% -7.38% 17.05% 17.08% -7.48%
Municipal extraction O -00% -9.02% 17-05% 15.51 % -7.48%
Abatement cost avoided 0.00% 1-24% -10.88% -10.88% 1-24%
Total aquifer benefits 0.00% -1 -23% 4.06% -4.40% -0.89%
lower than welfare under the quantity focussed approach than under the common pool

approach. The Iargest portion of the welfare Ioss is borne by municipal extractors (9.02%).

However, aggregate benefits decline by only 1.23% of the benefits obtainable under the

optimal outcome.

The quality focussed approach results in are large gains by water extractors (17.05%)
and large losses to b e r s (10.88%), when compared with the optimal outcome. Total

welfare is reduced by 4.0696, prirnarily because farmers are constrained (by statute and

regulation) to engage in pollution abatement activities that contribute smalIer benefits to

extractive users.

The separate quality and quantity management approach includes the abatement

activities of farrners the restrict onsite disposal to 15 kg nitratehectardyear plus the annual

adjustable permit on municipal extraction. This results in a 4.4% decline in the net present

value of benefits, cornpared to the optimal outcome. However. municipal water users are

better off under this management approach by 15.5 18, self-supplied extractors are better of

by 17.08% while farmers are worse off by 10.88%.

Clearly, the constraint on onsite disposal helps to lower the treatment cost of water

and at the sarne tirne encourage larger withdrawals. Figure 4.5 illustrates this point by

presenting the totd withdrawals for three management approaches: the quality focussed

management only, the cornrnon pool approach, and the optimd integrated approach. Each

scenario is associated with different average levels of onsite disposal. Under the quaiity

focussed approach that restricts onsite disposal to the lowest average annual level, the rate

of withdrawal is the highest over the planning horizon. Withdrawals stabilize at just over
1.5 million cubic metres. Under the cornmon pool approach withdrawals are actually lower

(on account of the higher treatrnent cost for water). Because of the higher rate of onsite

disposal, withdrawals stabilize at a lower rate o f 1.3 1 million cubic metres. However, the

cornmon pool level of extraction is less than the optimal rate of withdrawai of 1.37 million

cubic metres under the integrated quality and quantity approach.

As the benefit functions of both self-supplied and municipals extractors have

experienced no change, the only factor explaining the difference in consumption is the

change in the marginal cost of treatment under different levels of onsite disposal. This

demonstrates that the optimal balance of both activities is what generates maximum

economic benefîts.

4.6 Sensitivity Analysis

The results are consistent even when some of the parameters of the rnodel are

changed. T o illustrate, the results from the integraated mode1 are discussed under varying

conditions for the demand function for water, treatment cost for water and the rate of decay

for nitrates in groundwater. In each case, the integrated approach remains optimal.

4.6.1 Increased benefit functions for onsite disposal and extraction

The agncultural cost avoidance functions suggest that the marginal value of the

aquifer for agricultural waste assimilation is very high. On the other hand, based on the

groundwater benefit functions used in the model, the marginal value of groundwater for

extractive purposes is not very high. This result is obtained primarily because of the assurned

form and parameter values of the benefit functions. Therefore, water extraction benefit
functions were varied to determine the responsiveness of the mode1 results to the benefit

functions used. This was done by changing the elasticities of self-supplied and municipal

demand- The elasticity of residential demand was changed to -0.4 (estimated by Harris,

1992) and the elasticity of municipal demand was changed to -0.25 (as reported by Tate,

Renzetti and Shaw, 1992). The change in the demand functions resulted in larger marginal

benefits of water in extractive uses,

The full results of the changes are reported in Appendix F, Tables F-1 to F-5.The

data show that the optimal outcorne has a small reduction in onsite disposal but a notable

increase in the quantity of extractions has occurred. The water table is deeper due to the

larger volume of withdrawals. Larger amounts of extraction occur pnmady because of

higher marginal extractive values compared with the unchanped marginal cost of water

treatment.

These results also indicate that higher marginal values for extracted water will

increase the economic benefit of the aquifer's extractive use. The results reported in the

appendices are surnrnarized in Tables 4.18- 4.20. With less elastic demand (Le., higher

demand) functions for groundwater extraction the net present value of benefits solely from

extractive uses are doubled (compare Tables 4.18 and 4.15). Also, totai extractive and non-

extractive benefits from the aquifer are approximately a third larger compared with the base

results. The increases are estimated in all five management approaches but the ranking of

outcornes is the same as in the base results.

Table 4.19 shows that the distribution of benefits is different also. Benefits to self-

supplied water extractors have increased under al1 scenarios from a range of 2.29%-3.0%
 Table 4.18 Net Present Values of Five Groundwater Management Approaches
(With lncreased Marginal Benefit for Water)

Management Approach Optimal Quantity Quality Separate Common Pool

Outcome Focus Focus Management Approach
s s B S s
Self-supplied extraction 2,215,030 2,093,048 2,475,091 2,475,294 2,092,853
Municipal extraction 32,020,121 30,808,176 34,357,219 34,263,368 30,902,074
Abatement cost avoided 47,488,797 48,1l5,409 42,355,770 42,355,770 48,115,409
-Total aquifer benefits 81,723,949 81,016,632 79,188,080 79,094,432 81.1 10,335

Table 4.19 Distribution of Benefits Under Five

Gmundwater Management Approaches
(With lncreased Marginal Benefit for Water)

Management Approach Optimal Quantity Quality

Outcome Focus

Self-supplied extraction 2-71% 2.58% 3.1 3% 3.13% 2.58%

Municipal extraction 39.18% 38.03% 43.39% 43.32% 38.10%
Abatement cost avoided 58.1 1% 59.39% 53.49% 53.55% 59.32%
-Total aquifer benefits 100.00% 100.00% 100.00% 100.00% 100.00%

Table 4.20 Differences In The Distribution of Benefits

(Each Approach Compared To The Optimal Outcome)
(With lncreased Marginal Benefit for Water)

Optimal Quantity Quality Separate Cornmon Pool

Outcome Focus Focus Management Approach

Self-supplied extraction 0.00% -4.68% 15.32% 15.47% -4.80%

Municipal extraction 0.00% -2.94% 10.73% 10.56% -2.76%
Abatement cost avoided 0.00% 2.20% -7.95% -7.84% 2.09%
Total aquifer benefits O.OC% -0.87% -3.10% -3.22% -0.75%
under the base run (Table 4.17) to a range of (2.58%-3.13%) i n Table 4.19. However,

municipal customers benefit much more. Their share of the discounted net present value of

benefits in Table 4.17 ranged between 20.24%-26.8 1%. This share has increased to between

38.0395-43-39 % in Table 4.19. Agicultural cost avoidance represented between 70.2% and

77.46 % with demand functions for water in the base run (Table 4-17), but is between

53.55% and 59.39% with the new demand functions for water (third row of Table 4.19).

Thus, higher demand functions serve to alIocate a larger portion o f the aquifer's benefits to

extractive users (compare Tables 4.16 and 4.19).

The sumrnary in Table 4.20 shows that the foregone benehts from any non-optimd

management approach would be relatively smaller when less elastic demand functions for

groundwater extraction are used. For example, in the base case, self-supplied extractors

would gain 17.08% more benefits under a separate management approach than under the

optimal outcome. But these benefit would be 15.47 % higher than the optimd outcome when

the more elastic demand functions were used.

In al1 other cases, the foregone benefits from pursuing a non-optimal management

approach are smaller when the demand function for groundwater are less elastic. However,

as Table 4.20 shows, the distributional difference would be greater. A quality focussed

approach results in the most favourable outcome for municipal extractors; a separate

approach favours self-supplied extractors, and a quantity focussed approach most favours

agricultural producers.
4.6.2 Change Treatment cost

The results show that the cost of treatment is an important factor determining the

optimal levels of extraction. To test the effect of treatment cost on the model, the value of

the marginal treatment cost coefficient was lowered to 50% and increased to 150% of the

base level. Table 4.21 presents the results.

By reducing the marginal treatment cost by 5096,the annual optimal level of level of

onsite disposal increased by 4.8%; the level of water withdrawal increased by 17.8%, and the

general depth of the water table increased by 2.2 metres from the base level.

When the marginal treatrnent cost was increased to 150% of the base value, the Ievel

of total water extraction decreased by 17.2% ,the level of onsite disposal decreased by 2-7%

of the original amount. This led to less drawdown of the water table, such that, by the end

of the planning horizon the water tabIe was 0.8 metres closer to the surface than in the base

case.

These variations in the treatrnent costs demonstrate that the cost of treatment can be

a major factor influencing the eventual level of groundwater stock. They also show that

treatment may be a major factor determining the optimal rate of onsite disposal. In Figure

4.5, the optimal level of onsite disposal is larger as the marginai cost of treatment is lowered.

This is consistent with the derivations in Chapter 3 which indicate the optimal level of onsite

disposai is deterrnined by the discounted value of extemai treatment imposed on extractors.

4.6.3 Change Decay Rate

The rate at which nitrogen decays in groundwater influences the rate of accumulation

of nitrates over time, and this will affect the cost of water treatment. The base level of the

rate of decay is 50%, which indicates that 50% of the cumulative amount of nitrate in

groundwater in any period will cany over to the next penod. To demonstrate the effect of the

rate of decay on the results, two alternative Ievels were specified: a lower rate 30% and a

higher rate of 7 0 % ~

A decay rate of 30% causes nitrates to build up to a greater degree and thus Ieads to

higher treatment costs for water (see Table 4.22). Because of higher treatment costs,

groundwater extractions decrease by 3 1.6%, but the optimal level of onsite disposal declines

only by 1.8%. Notably, the reduction in withdrawals is so large that the recharge rate

exceeds the rate of withdrawal. At the end of the planning horizon, the depth of the water is

19.6 rn which is 2.4 m less than the water table depth in period 1.

When the decay rate was increased to 70% there was a marked increase in the net

present value of aquifer benefits. The optimal rate of onsite disposal increased to frorn an

average of 20.4 kg per hectare to 21.1 kg per hectare. Total groundwater withdrawals

increased by 13.0% and water table depth was 1.24 metres greater than water table depth in

base run. Overall, the increase in the decay rate resulted in a 5.5% increase in net present

value of benefits. The conclusion to be drawn is that the variation in the rate at which

pollution decays is an important factor in the ailocation of activities occumng over the Table

Tne rate of decay for nitrates (denitrification) is affected by a number of climatological and
hydrological factors (see Hallberg, 1989).
. Table 4.22 The Effect 01 Nitrate Decay Rate On Total Withdrawals, Onsite Disposal And Depth Of Water Table
(Decay Rate Cholces Were: Base Run of 50%, 30%,and 70%)

lear Total 3nsite 1Water Total / Onsite 1Water ITotal 1 Onsite 1Water
Withdrawals Disposal l~able Withdrawals 1 Disposal l ~ a b l e 1withdrawals 1 Disposal l ~ a b l e
cubic metres metres :ubic metres 1kg ~ l h a Imetres lcubic metres 1kg ha 1metres
1921722 22.0 1922203 18.5 22.0 1921498 21 .O 22.0
1411302 22.3
1375895 22,4
1374660 22.5
1374622 22.6
1374640 22.7
1374700 22.8
1374836 22.9
1375039 23.0
1374940 23.1

t
Average
1355469
1 396353
22.9 1
20,5
Average percentage change from base
Discounted
23.2 1 836298
960867
-31,6% -1.8%
22.9
20.2
19.6 1559851
1575842
13.0%
22.9
21.1
2.9%
24.8

Benefits $62,889,000 $57,003,000 $66,362,000

Average percentage change from base -9.4% 5.5%
Wilmot Township aquifer.

4.6.4 Change Pumping cost

Purnping cost estirnates are not documented by private or municipal well operators

in Ontario. Estimates in this model are extrapolations from previous studies (Feinermann and

Knapp, 1983, and Worthington et al., 1985). The estimates are inconsequential in the results

of the model. To test whether higher pumping cost wodd affect the rate of withdrawd and

the optimal level of water table two other pumping costs were applied: double the base rate

and triple the base rate.

Table 4.23 shows the effect of a doubled pumping cost on the model. The net present

value of benefits fell by 0.5% of the base run. Total groundwater withdrawals decreased by

an average of 1.3 %, the optimal level of onsite disposai increased by from 20.5 kg N per

hectare to 20.6 kg per hectare (0.2%), and the water table at the end of the planning horizon

was only 0.15 metre closer to the surface.

When the pumping cost was tripled, the rate of total withdrawds declined by 2.5 %,

the optimal rate of onsite disposai increased by 0.3 %, and the water table at the end of the

planning was 0.25 metre closer to the surface. These results demonstrate that the cost of

pumping is not a significant determinant of choice variable in this particular case.

Finally, the model in Chapter 3, distinguished between the pumping costs of the

municipal extractor and the self-supplied extractors because it was felt that differences in
1 Table 4.23 The Effect of Pumping Cost On Total Withdrawals, Onsite Disposal And Depth Of Water Table

I (Treatment ~ o schofces:
t Base Run, 200% base value, 300% base value)

Nater rotal rotal 3nsite Water

rable Nithdrawals lisposal Table Nithdrawals lisposal rable
kg Nlha netres wbic metres cg Nlha metres :ubic metres cg Nlha metres
20.1 22.0 1904357 20.1 22.0 1887067.135 20.158 22.000
20.4 22.3 1393396 20.5 22.3 1375576.668 20.489 22.242
20.4 22.4 1357927 20.5 22.4 1340070.114 20.512 22.331
20.4 22.5 1356683 20.5 22.5 1338834.432 20.513 22.409
20.4 22.6 1356643 20.5 22.5 1338823.547 20.513 22,486
20.4 22.7 1356702 20.5 22.6 1338939.893 20.512 22,563
20.4 22.8 1356849 20.5 22,7 1339185.966 20.512 22,640
20.4 22.9 1357125 20.5 22.8 1339621.139 20.511 22.717
20.4 23.0 1357577 20.5 22.9 1340324.327 20.511 22,795
20.5 23.1 1357858 20.5 23.0 1340994.560 20.563 22.874
23.2 22.9 23.1 1 323164.941 22.936 22.950
1378681
. . . - - - . - . ..
.- - --

Average percentage change from base -1.3% 0.2% -2.5% 0.3%

Discounteci
Benefits $62,889,000 $62,579,000 $62,275,000
Average percentage change frorn base -0.5% -1 .O%
pumping cost would affect the optimal distribution of extractive activities? To find the

effect of differential pumping costs on the results, the municipal pumping cost was halved

while that of the self-supplied extractors was left unchanged. Under optimal management

arrangements, municipal withdrawals increased only by 0.6%, and self-supplied withdrawals

increased less than 0.1%. On the other hand, the optimal arnount of onsite disposai decreased

to by less than O. 1%.These changes in extraction, though very small provide some support

to the analysis of Chapter 3 (section 3.5 1.1) that differential changes in pumping efficiency

will lead to a reallocation of activities. Here, the change is marginal.

4.6.5 Other Sensitivities

The GAMS program was developed to give the integrated mode1 flexibility to change

several parameters. In addition to testing the effects of changes in economic variables, the

effects of changes in some hydrological variables were also exarnined. Table 4.24

surnrnarizes the effects of nine exogenous changes on the net present value of benefits, the

value of total withdrawals, and onsite disposal. The information is presented as a list of

sensitivity elasticities, which indicate the percentage change in net present value of benefits,

total groundwater extraction and onsite disposai in response to a percentage change in the

exogenous variable or fûnction listed in the first colurnn.

Table 4.24 shows that the net present value of benefrts is most sensitive to the area

of agicultural land that is sensitive to ieaching. A 1% increase in cultivated area, other

26 It soon became clear, frorn consulting well drilling professionals. that the variable pumping costs
were very small. Therefore, most of the simulations were done with the sarne pumping costs for seIf-supplied
and municipaI extractors.

157
 Table 4.24
Sensitivity Elasticities of Present Value of Benefits, Groundwater Extraction
and Onsite Disposal to Changes In Selected Exogenous Variables (')
Exogenous Change Benefit Extraction Onsite Disposai
Sensitivity Sensitivity Sensitivity
Elasticity Elasticity Elasticity

Area of cultivated land 0.75 -0.06

vulnerable to leaching
Marginal benefit function 0.75 -0.10
for agricultural cost avoided
Marginal benefit fiinction 0.50 0.07
for groundwater extracted
Maximum allowable 0.29 -0.25
nutrient loading
Natural rate of decay 0.23 0.80
for nutrient i n ~ o u n d w a t e r
Pumping cost per -0.0 1 -0.0 1
m3/metre of Iift
Cost of treating water for -0.17 -0.36
nitrate contamination per m3
Vertical distance to -0.0 1 -0.0 i
water in aquifer I I I
- --

Zone of influence for -0.00 -0.00 0.00

municipal well '2'

Notes:
(1) Sensitivity elasticities were calculated as follows:
benefit sensitivity elasticity = %A present value of benefits/%A in exognous
variable;
extraction sensitivity elasticity = %A extractionf%A in exogenous variable;
onsite disposal sensitivity elasticity = %A onsite disposal/%A in exogenous variable.
(2) Elasticities reported as 0.00 or-0.W were found to be smaller than l/lOOO% but had the
expected signs.
variables lefi unchanged, would cause a 0.75 % increase in discounted benefits and a 0.16%

increase in the optimal level of onsite disposal but a small reduction in groundwater

withdrawal (-0.06%). Thus, area of cultivated land is positively related to total aquifer

benefits and onsite disposal but negatively related to groundwater e~traction.~'

The mode1 is also sensitive to the choice of benefit function for extracted

groundwater, the function representing agricultural cost avoided, the maximum allowable

loading of nutrients, the decay rate of nutrients, and the cost of treating water for nutrient

contamination. The model is not very sensitive to changes pumping cost or changes in the

two hydrological parameters (depth of aquifer and groundwater interference).

The sensitivity of the model to changes in the demand for water was demonstrated

in section 4.6.1. The exogenous increase in the demand for water resulted in more

groundwater extraction, This sensitivity is also noticed when demand is growing at an annual

rate. For example, with a 2% growth rate in demand, the optimal allocation of water to

extractive uses increased by 4.5% over the base results. The optimal amount of onsite

disposal declined progressively toward the latter portion of the planning horizon as the

benefit for extractive uses increased.

Finaily, the model was also checked for its sensitivity to the discount rate. A lower

and higher discount rates, 4% and 1296, were imposed on the mode. It was found that the

lower discount rate encouraged more groundwater extraction, but resulted in less onsite

disposal. The discount rate of 12%produced the opposite effect. These observed responses

27 Generally, irrigated cultivation is not practiced in Wilmot Township, but if irrigated cultivation was
being done, the negative relationship between onsite area cultivated and groundwater extraction would not
necessaiiIy hold.
are consistent with economic theory, but they are smaii magnitude; for exampie, te changed

in demand and onsite disposal were Iess than 1%.

Summary

The chapter has demonstrated the relevance of an integrated perspective in aquifer

management. The chapter adapted the general mode1 of Chapter 3 to the empirical

groundwater poiicy considerations facing the Regional Municipality of Waterloo and the

Ontario Ministry of Environment (quality and quantity managers, respe~tively).'~With

information about the physical characteristics of the area, the benefit functions for

groundwater, and the abatement cost functions of an area, groundwater policy objectives can

be set with more importance attached to the econornic value of extractive and non-extractive

benefits of the aquifer. Clearly, the optimal approach is to adopt an integrated approach that

takes a broad view of the groundwater management problem. Nevertheless, implementing

an integrated management approach is not costless. It is the added cost of bnnging about the

change that will be the focus of the final chapter.

28 As has been stated earlier in the chapter, the simplifying assumptions are considerable, in some
cases. To this effect, it rnay be more accurate to refer to this chapter as very rudimentary representrition of
reality. Better information would provide results that sharpen confidence, but the conceptual approach
presented would not change.
 Chapter 5

Policy Implications For Groundwater Management

5.1 Introduction

The empiricd application of the integrated quantity-quality mode1 in Chapter 4

provides a reference point fiom which the discussion of Ontario's groundwater management

policy in Chapter 2 can be evaluated. Specifically, it shows that, by pursuing an integrated

approach to aquifer management, an efficient outcome is obtained, and that any other

management strategy would be sub-optimal. This chapter uses the results of Chapter 4 to

address the incornplete discussion about implementation costs in Chapter 2. UItimately, it

wil1 provide answers to two questions:

1. What policy inferences should be drawn from the results?

2. How practicai is the integrated quality-quantity approach to aquifer management in

Ontario?

The next section (5.2) sumrnarÏzes îhe results obtained in Chapter 4 and compares

the sizes of efficiency losses generated by each non-optimal management alternative. Section

5.3 examines practical aspects of institutional and operational changes required for

implementing an integrated quality and quantity management approach in Wilmot Township.

Section 5.4 revisits the issue implementation costs as a component of the decision rule for

changing from a given groundwater management policy to another. In a world of zero

implementation costs, the implications of the results in Chapter 4 indicate that it is dways

optimal to pursue an integrated approach to groundwater management. In a world of non-

zero implementation costs, céanging fiom the status quo to an integrated approach may not

be optimal.

5.2 Review of Empirical Results

The base results from Chapter 4 are summarized in figure 5.1. They show that the net

present value of benefits fiom the aquifer is highest under an integrated approach. Arnong

the four alternative approaches examined, the common pool approach results in the second

highest net present value of benefits, followed by the quantity focussed approach, the quality

focussed approach and the separate approach, respectively.

The solution from the integrated approach is optimal within a specifïc context. In the

f'rst place, such an approach requires the coordinating effort of a centrai management agency

to reduce the transaction costs of individud negotiation. Coase (1960) has shown that

reducing high transaction costs is the primary reason for the intervention of a central agency

in resource management. This study does not attempt to prove that transaction cos& in water

management are high; a body of literature has adequately made the case (Young, 1986 and

Young and Haveman, 1985). The integrated approach is optimal with respect to the five

management scenarios compared. It rnight be inferred, therefore, that the integrated approach

should be pursued. That would be correct if it is assumed that the cost of implementing an

integrated approach is smailer that the potential welfare benefits to be denved, or if an

integrated approach is being pursued currently.

 Figure 5.1

Present Value of Benefits From Aquifer

1 1

Cornmon pool approach

1
1
I
i t I I I

t
1

1 l
I
l I
1
Separate approach I i
Qudity focussed approach
I
1
l I

Quantity focussed approach

! I 1
1
1 t 1 I 1 I
1
Integrritcd approach
t I
t I

60 61
Benefits ($ Million)

For the moment, assume that irnplementation costs are zero. Table 5.1 shows the size

of welfare losses associated with each approach as is implied by the results in 5.1 - The

welfare loss associated with the common pool approach are lowest. In d l cases, the losses

associated with an unintegrated approach range between $776,000 and $2,766,000. These

losses correspond to potential increases ranging from 0.898 to 4.4% of the size of benefits

associated with each management approach. In the comrnon pool outcorne, adopting an

integrated approach would lead to a 1% gain in welfare. Shifting from a separate approach

to the integrated approach would result in a 4.40% gain in the net present value of benefits.

The range of the potential welfare gain from implementing integrated quality-quantity

management is in the neighbourhood of estimates welfare gain from central management of

water resources. Kelso (1961) estimated that the improvement in welfare moving from a
common pool management regime for extraction to optimal control was 4%. Feinnerman and

Knapp (1983) estimated the potenüal gain at approximately 14%. Gisser and Sanchez (198 1)

found no change in welfare in moving from no contrd (where landowners have transferable

titles for groundwater stock), to optimal control. Renzetti (1992) found that efficiency gains

from water pricing reforms in Vancouver was approximately 4%. The potential efficiency

gain in this dissertation is, therefore, not small. Moreover, when the size of the land area is

considered, it is clear that total provincial saving from integrated aquifer management would

be substantid.

The ranking of outcomes is partiaily dependent on the assumptions about what

management targets are set under each management approach. Under a quality-focussed

approach, a maximum allowable level of onsite disposal Iower than the optimal level would

result in smaller gains to extractive users than the abatement costs incurred by farmers.

Similady, restrïcting annual permitted extractions to quantities below the optimal amounts

would cause a smalier net present value of savings in future pumping costs than the current

extractive benefits gained.

Table 5.1 Net Present Value of Welfare Losses Associated

With Four Non-Integrated Management Approaches
Size of welfare Percentage
Management Approach loss compared
to the optimum

Common Pool Approach $56 1,000 0.89%

Quantity Focussed Approach $776,000 1.23%
Quality Focussed Approach $2,553,000 4.06%
Separate Approach $2,766.000 4.40%
 As the sensitivity anaiysis shows, the size of these benefits gained and lost is

determined primarily by the area of cultivated land, the marginal benefit function for

agricultural cost avoided, water demand functions, the decay rate for agncdtural nutrients,

and water treatment cost fûnctions. The claim in Chapter 2 that groundwater management

poLicy in Ontario produces a welfare loss is confirmed. However, the results aiso indicate that

the efficiency losses associated with the current common pool management regime are not

substantial. Similar results were obtained by Gisser and Sanchez (1980) who compared

potential extractive benefits from an aquifer under optimal control with the benefits under

common pool management. They found no substantial increase in benefits from optimal

control.

In interpreting these results, it must be borne in mind that the full environmental costs
of agricultural waste assimilation and extraction were not considered in the model, e.g., cost

of dismpting ecosystem integrity. It is likely that the welfare losses would have been greater

it these cos& had been included,

5.3 Implementing an Integrated Approach

In the analysis of Ontario's groundwater quantity management policy in Chapter 2,

it was shown that groundwater users operate largely under common pool institutional

arrangements. Self-supplied extractors need not account for the effect of their extractions on

other users, neither are they protected from the effects of others. Municipal demands for
water perrnits are usuaily granted and are rarely reduced.' Thus, extractors operate under

common pool mies.

Groundwater quality management is also done under common pool niles. WelI head

protection activities are undertaken only in capture zones of municipal wells. Al1 other areas

outside municipal capture zones have no centrally administered water quality protection

program. In areas where a water quality program exists, the objective is to improve water

quality for the municipal supplier, not necessarily the water qudity of self-supplied

extractors.

Based on these results, the comrnon pooi groundwater management policy in Wilmot

Township and in the rest of Ontario is ineficient (assurning zero implementation costs of the

integrated approach). However, the assumption of zero implementation cost transaction is

weak given the kinds of changes that would be required for an integrated approach. This

section shows that only a few operational and institutional changes would be necessary to

integrate groundwater management. And while a detailed discussion of the necessary

operational and institutional issues is outside the scope of this study, a bnef overview would

help to demonstrate that the approach is practical. Ir is the cost of these changes measured

against the efficiency losses that will determine whether an integrated approach is optimal

in practicd terms.

'In rennt yearç the Ministry of Environment has been issuing water permits for indefinite periods.
In addition, new permits are usually issued provided that required well tests and environmental impact
assessrnent studies indicate no well interference,
5.3.1 Operational Changes

Operational changes refer to those adjustments in the groundwater management

decision process that are necessary, if institutional structures are in place for the optimal

result. Chapter 2 has already shown that the status quo, involving the detached and

unintegrated approaches by the Ministry of Environment and regional authorities, precludes

integrated groundwater management. Two changes are required to remove the impediment.

First, a process must be established whereby the t h e paths of extraction and waste

assimilation are determined. Essentially, this would require either close collaboration of the

agencies currently responsible for water quality and quantity management or centraiizing

authority for water quantity and quality management in one agency. Without either of these

changes the competing interests of various aquifer users would not be reflected in the choices

of activities.

Optimization does not require that responsibility for groundwater quality and

quantity management rest with a singIe authority. Instead, the only requirement is that there

be coordinated decision making between the Regiond Municipality of Waterloo, which is

responsible for quality and the Ministry of Environment, which is responsible for water

quantity allocation. Thus two agencies, acting in a coordinated manner, work to internalize

pumping cost and stock externdities.

However, the existence of a central authority or two collaborating agencies does not

ensure the pursuit of an integrated approach. Clearly, groundwater is state property and

agencies of the state such as the Ministry of Environment and regional governrnents have the

power to manage it optimally. Yet, water use policy (permit program and water quality
protection program) as such that water is managed mainiy as a cornmon pool resource Thus.

there is Iittle linkage between resource ownership and management responsibility. The reason

is that govemment agencies cannot always be depended on to pursue policies that will

eliminate extemdities (Anderson and Lead, 1994 and Brubaker, 1995). Thus, in

irnplementing an integrated approach, there is an implicit assumption that there is no policy

failure by management agencies.

The second operational change required for the integrated approach is tu devise

means through which the efficient allocation of activities among aquifer users can occur. It

is not suficient that the optimal time path of extraction and onsite disposal are known. The

allocation of abatement activities between farmers and the distribution of water among

extractive users must d s o be efficient. Such an efficient allocation of activities is obtained

by providing incentives for individuals to make efficient decisions. This can be done through

a variety of rnechanisms.

One approach that appears appropriate was descrïbed by Anderson et al. (1983)

proposing the privatization of groundwater recharge shares in Kem county, California in the

1970's. They proposed a rnodified private property approach for optimal groundwater

extraction in which a central groundwater management agency would determine the

equilibnum stock of groundwater through optirnization modelling. The equilibnum stock is

associated with a water table depth below which stocks must not f d . If current groundwater

stocks exceed this equilibnum Ievel, private nghts for groundwater stock can be issued for

the difference between actual stock and minimum necessary stock.

In the approach proposed in this dissertation, the difference is that groundwater

extraction, as weU as onsite disposai, would be the choice variables in aquifer management

- as opposed to groundwater extraction alone in the approached recommended by Anderson

et al. (1983).

Once the optimal levels of extractive activities are known by groundwater managers,

transferrable pennits are issued to groundwater users, perhaps, based on historical arnounts.

With transfemble permits, groundwater extractors are free to exchange permits with others

who may have greater economic use for the resource. The scarcity of the resource will then

be refiected in the trade prïces of permits.

Similarly, the distribution of onsite disposal activities can also be efficientiy achieved

by issuing tradeable onsite disposal perrnits.' Thus, the integrated approach c m be pursued

through a combination of centralized and decentralized decision making in Wilmot

Township and the rest of Ontario.%ecision making would be centralized in that the central

groundwater managers jointly determine the efficient ievels of activities. Beyond this level

of government involvement decisions would be decentralized in that individual choices

based on economic information would detennine how activities are allocated between user

groups.

2
It is assumed that groundwater managers have the ability to observe the individuals activities of
groundwater users whether they are involved in onsite disposa1 or extraction. CenainIy this is difficult but
not entirely impossible.

'The pumping externality associated with the cone of depression created by municipal extraction can
be factored into the cost of permits. However, the results show that the external pumping cost created by a
municipal cone of depression would be nedigible, given the cost of pumping. Thus, the well interference issue
is more a problem of wells that are dug too shallow such that they are affected by modest seasonal variations
in the water table.
53.2 Institutional Changes

Apart from operational changes in aquifer management, implementing an integrated

approach would require changes in the rules for groundwater extraction and onsite disposal.

Institutional arrangements are determined primarily by the terms of the Ontario Water

Resorrrces Act and environmental statutes affecting onsite disposal. institutional changes to

these statutes would be necessary to integrate groundwater management. First, the cornmon

pool arrangement for self supplied extractors would need to be discontinued so that al1

extractors are brought under the sarne d e s . Second, the property rights of farmers engaged

in onsite disposal with respect to water quality legislation would need to be clarified. These

two issues are elaborated in the following sections.

5.3.1.1 Discontinued Exemption for Self-SuppliedExtractors

Results from this study and previous groundwater extraction studies show that al1

extractors contribute to groundwater extraction extemaiities. In order to implement the

integrated approach, groundwater managers must be able to adjust withdrawals from the

aquifer as the necessity aises. However, under current niles self-supplied extractors cannot

be legally required to adjust their withdrawals by the Ministry of Environment. Only when

self-supplied extractors are no longer exempt under the Ontario Water Resources Act will

the water quantity management agency's choices aKect the choices made by self-supplied

extractors.

Chapter 4 indicates that the exemption of self-supplied extractors from the provisions

of the Ontario Water Resources Act does not generate large efficiency losses. However, as

the nurnber of self-supplied extractors grows, the total extraction grows and groundwater
scarcity would emerge. Since there is no incentive for self-supplied extractors to conserve

water under current niles, the continued exemption of this group from the quantity

management authority of the Ontario Ministry of Environment will increase the size of the

welfare loss (section 3.4.1).

5.3.1.2 Clarification of Agriculturai Exemption From Water Quality Statuts

Pollution rights with respect to agricultural producers should be more clearly defined.

The Ontario Water Resources Act, the Environmental Protection Act, and the Environmental
Bi11 of Rights together assign powers to the Ministry of Environment the power to control

groundwater quality. Over the yem, the Ministry of Environment has delegated these powers

to municipalities that have, mostly, used landuse zoning restrictions to protect well water

from agicultural contamination. However, it is unclear whether farmers have a right to

engage in onsite disposal despite the regulatory powers of municipalities.

The recent passage of the Faming and Food Production Protection Act (1997)

protects farmers carrying on norrnal farm practices from liability in nuisance law suits from

neighbours and from court orders prohibiting farmers from carrying on such activities. If

groundwater impairment from fertilization activities is covered under this Act, farmers have

the right to pollute (under normal circumstances) and the municipalities are the one who

must be prepared to compensate farmers for restraining from onsite disposal.

However, the Faming and Food Production Protectio~zAct (1997) may not provide

immunity from prosecution and law suits for most normal agricultural activities as farm

groups have desired (e.g., Good, 1997). If fertilization activities are not exempt from current

water quality protection statutes, f m e r s may have to negotiate with municipal authorities
for onsite disposal rights. It is the resolution of this uncertainty that is important since control

of property nghts for onsite disposal would determine whether onsite disposal pennits or

individual negotiations are used in the integrated groundwater management program.

5.4 Decision Rule for Changing Management Approach

The changes associated with an integrated approach (clarifying property rights for
water quality, removing exemptions enjoyed by self-supplied extractors and ailocating

activities based on marginal values) will necessitate institutional changes and incur expenses

in information gathering, monitoring and administration. Given the existing cornmon pool

management approach, the decision rule for deterrnining whether an integrated approach

should be pursued is the following: the cornbined costs (implementation costs) of introducing

an integrated approach should be smaller than the potentiai gain from pursuing an i n t e p t e d

approach-

If implementation costs exceed the potential welfare gains from the integrated

approach, implementing an integrated approach for groundwater management would resdt

in a net decrease in econornic benefits. Conversely, if irnplementation costs are smaller than

the potential welfare gains under an integrated approach a net increase in economic benefits

would result.

It is difficult to determine the costs of implementing the integrated approach ex ante.

Administrative costs c m be estimated (e.g., costs of monitoring, and permit issuing). But the

costs of institutional change are more dificult to determine because of the unique nature of

the resource (Young 1986). Thus, while specific figures are not available, the implementation
costs of adopting a new management approach are clearly non-zero, indicating that the size

of implementation costs will affect the economic feasibility of groundwater management

approaches. For example, current exempt usen of groundwater can be expected to incur costs

to resist proposed changes. Even this c o d d add to the implementation costs of institutional

change.

Also, the Ministry of Environment would incur irnplementation costs related to

improved monitoring of groundwater quality and groundwater extraction. These would

include the cost of dnlling and maintaining observation wells, costs of installing water

metres on a l l welIs to measure extractions and, the cost of monitoring of land use practices.

Further, acquiring information about the benefits and costs of onsite disposal could be greeater

than current administrative costs faced by the Regional Municipality of Waterloo and

administrative costs of the Ministry of Environment. These too wiil augment implementation

costs.

Once irnplementation costs are accounted for, introducing a new groundwater policy

may not be economically feasible. In such a case, the status quo, though theoreticdly

inefficient, could be the best outcome until the potential efficiency gains from increased

scarcity make it feasible (Demsetz, 1967).

The above discussion brings the dissertation to an important decision point. If, in

practical terms, the efficiency Ioss of current management practices may be smaller than the

implementation cost, why should Ontario pursue an alternative integrated management

approach as is suggested in Chapter 2? The suggestion is made because of the information

that an integrated approach provides. As the resource becornes more scarce, existing
mechanisms wiU reailocate its use over time and between users based on its marginal

economic value. However, under the cornmon pool regirne the growing scarcity of

groundwater in Ontario would be reflected only in increasing conflicts between agricultural

and extractive users or between nual and urban interests. Thus, the integrated approach to

groundwater management provides a strategy through which die increasing scarcity of

extractive and non-extractive activities in groundwater can be efficiently addressed.

FinaIIy, it should be noted that the implementation costs of an integrated approach

would involve changing provincial institutions since the rules for groundwater are

established at a provincial. level. But the potential benefits have been estimated only for

Wilmot aquifer, which is only a fraction of groundwater resources in Ontario. The

appropriate cornparison would be between the potential benefits of pursuing an integrated

approach for al1 aquifers in Ontario and the implementation cost.

 Chapter 6

Conclusion

6.1 Summary ofResearch Results

This thesis contributes to the discussion of two important issues in aquifer

management. F i t , what approach should a groundwater manager adopt to determine the

economically optimal inter-temporal rates of water extraction and water quality degndation

in an aquifer? Second, what policy implications does this approach have for aquifer

management in Ontario?

Loosely defined institutional arrangements for groundwater give rise to extemalities

that hasten the depletion and degradation of the resource, thus reducing potential econornic

benefits. Implementing policy measures to correct water extraction or pollution externalities

is an approach often proposed in the literature. However, where both types of externalities

exist, the correct management approach is one that accounts f o r the economic

interrelationships between the extractive and non-extractive uses of the aquifer. Not

accounting for the non-extractive uses of an aquifer would result in the undervaluation its

economic benefits. In this dissertation, agricultural waste assimilation benefits are used as

an example of non-extractive uses.

The interrelationships of aquifer use are examined with the aid of a dynamic

programming mode1 that rnaximizes the net present value of drinking water benefits and

agricultural waste assimilation benefits under (a) comrnon pool institutional arrangements

and (b) integrated institutional arrangements. The mode1 shows that optimal choices of
groundwater withdrawal and agicultural waste assimilation should be sirnultaneously

determined with an integrated approach. Thus, groundwater management by common pool

institutions is theoretically sub-optimal.

The mode1 is applied to an aquifer management problem in Wilmot Township,

Ontario. Extractive benefits are rneasured using water demand functions. Agicultural waste

assimilation benefits are rneasured using farmers marginal abatement cost functions for

nutrient waste. Despite state responsibility for groundwater and enactment of various

environmental statutes affecting groundwater, the resource is currentiy managed as a

common pool resource among extractors and farmers. Empirical results show the following:

a. The present value of aquifer benefits achieved under current cornmon pool

institutional arrangements is sub-optimal. However, the welfare loss under this

management approach is less than 1% of potential economic benefits under an

integrated approach. Where the cost of switching from one management approach

to another is zero, the integrated approach is always optimal and Ontario's water

managers could increase aquifer benefits by pursuing an integrated approach.

b. A different policy implication for groundwater management in Ontario is that, given

the s m d l potenual gain from implementing an integrated approach, a high cost of

irnpiementation could exceed the benefit, thus making the current cornmon pool

outcome desirable. However, as resource scarcity increases (due to changing demand

or additional groundwater uses) the potential gains of management approach may

increase.

c. Non-integrated groundwater management regimes intended to address extraction or

 pollution extemalities without accounting for economic interrelatioaships could yield

lower aquifer benefits than curent cornmon pool regirne they were meant to improve.

Three alternative non-integrated management approaches were considered- Each was

found to be less beneficid than the common pool approach. However, the

distribution of benefits varied depending on whether groundwater managers (Le., the

Ministry of Environment and municipal governrnents) focussed on controlling

perceived pollution or extraction externalities, or both.

d. The main factors influencing the optimal allocation of activities are the marginal

value of the aquifer for waste assimilation, the natural rate of decay of nutrient in

groundwater, the cost of treating water for nutrient contamination, and the marginal

benefit function of groundwater extracted. Contrary to the findings of some

groundwater extraction models, the cost of pumping is not a significant factor

influencing the distribution extractive activities; consequently, groundwater

interference (a special case of pumping externality) is not an important consideration

in the allocation of extractive activities.

6.2 Theoretical and Empirical Contributions of Integrated Approach

The purpose of this thesis was to show that in the presence of extraction and pollution

externalities, pursuing aquifer management by integrating quantity and quality relationships

into a single econornic problem is optimal and results in a better understanding of aquifer

management problems than with nonintegrated approaches. An economic model of the of the

integrated quantity and quality approach was developed with an empirical application to
Wilmot Township.

As has been shown by Provencher and Burt (1993) the user cost for groundwater

extraction depends on the effect of extraction on the pumping cost and the number of

extractors. From the analytical results of this study, the user cost of onsite disposa1 is shown

to be tied to the number of extractors, the penod required for the leached nutrients to be

assimilated into the environment, and the cost of treating water for nutrient contamination.

The model developed is applicable to areas affected by groundwater extraction

problems, onsite disposal problems or a combination of both. Aquifer managers need not

make assumptions about whether an extraction or onsite disposal problem should receive

management prionty since this information is derïved from the results of the empiricai

application.

The empirical application serves primarily as a dernonstration of the model. Because

of the imperfect nature of treatment cost data, the results should not be used as specific

prescriptions for groundwater policy deveIoprnent in Wilmot Township or the rest of

Ontario. However, the results attest to the practicality of the model. Also, a sense of the

relative econornic contributions of extractive and non-extractive activities in the Wilmot

Aquifer is offered. They indicate that extemalities created by onsite disposai may be far

more important than the extemalities created by groundwater extraction.

Further, the results of this dissertation are generally important because they point to

a principle that should be remembered in al1 aspects of resource management. That is,

resource management problems must first be examined carefully and the interrelationships

of activities should be understood before measures are put in place to address different
issues in a non-integrated manner. As has been shown in the quaiity and quality focussed

approaches, policies intended to solve problems could be working in the opposite direction.

6.3 Limitations of The Study

The theoretical model of this thesis was done under the assumption of no uncertainty

about the fate of groundwater pollutants or the annual rate of groundwater recharge.

Uncertainty is an important issue in groundwater modelling when there is substantial

variability in precipitation and in the fate of pollution (e-g-, Provencher and Burt, 1993 and

1994). However, the use of average recharge rates over a lengthy horizon should not affect

the relevance of the results, since the long run recharge rates would be less variable. Also,

detailed hydro-geologic information about the research area is suffxcient to obviate the need

to incorporate uncertainty into the modelling of onsite disposal.

The focus was placed on oniy one byproduct of leaching, nitrate nitrogen. This

implies that though the theoretical results are relevant to wide variety of cases, the empirical

results Say nothing about benefits of an aquifer for the assimilation on non-nitrogen

fertilizers,

Further, the model assumes that aagicultural fertilization activities are the onIy

sources of nitrates in groundwater. In reality, the natural levels of nitrate in groundwater can

be quite high (Goss e t al., 1993). And this can increase the cost of water treatrnent. Aiso, as

the population of non-agriculturai residents increases in an area, the non-a_grïcultural sources

of nitrates will increase. Under these circumstance, non-agricultural sources of nitrate should

be incorporated into the empirical research. The empiricd study has not incorporated non-
agriculturd sources of nitrate, but the analytical framework can be adjusted to do so-

The model assumes that the marginal abatement cost fûnctions are identical based on

the assurnption that crop choice and cultivation systerns are uniform throughout the research

area. While it is true that information about farrners' activities, such as, crops mix, rotation

practice, fertilizer rate of application tend to be similar in given agriculturd communities,

there is no guarantee that this information wili not v a q widely. Thus, the cost avoided by

onsite disposal in this model is only an average cost.

Finally, the mode1 does not account for the fuli environmental cost caused by excess

nutrients. The cost of excess nutrients in extracted water is measured with the increased cost

of water treatment. However, excess nutrients flowing to surface water bodies could affect

the aesthetic value of water or its suitability for sustaining wildlife. These costs were not

included in the model. However, they would reduce the net marginal value of onsite disposal.

6.4 Further Research

This model has demonstrated the importance of information about the benefits and

costs of groundwater extraction in making optimal decisions. Many simpliSing assumptions

were made but further research should specificalIy address these areas.

Demand elasticities estimated by Remetti and Dupont (1997) were used to construct

dernand fùnction for self-supplied extractors and municipalities. However, linear demand

functions have likely resulted in lower marginal values for water with increasing scarcity.

This indicztes a need to examine the sensitivity of the mode1 to alternative functional forms.

In addition, specific demand functions for the areas of research may be more appropriate.
Thus, there is need to examine how a demand function specifically estimated for Wiirnot

Township may differ from that assumed in the model.

Clearly, since treatment of groundwater for nitrate contamination is not done in

Ontario, the vdidity of the marginal extemai cost of onsite disposal could be chailenged.

Alternative approaches that could be used in further research inctude estimating the cost of

locating new groundwater sources or the cost of establishing and operating nitrate treatment

facilities.

Further, the possibility of a discontinuous marginal cost function for treating

groundwater for nitrate contamination was discussed. However, computer software

limitations did not permit use of the discontinuous marginal treatment cost function. The

results could have been quite different using a discontinuous cost function. Thus further

research should address this issue.

Finally, further research is needed to determine how changes in the lateral movement

of contaminants in groundwater will affect results of the model. Less lateral movement

would likely reduce the external cost of onsite disposal and increase its optimal level.
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Appendices
List of Symbols Used

- periodic benefit function for groundwater use net of conveyance costs.

- the amount of water withdrawn and treated in time t.

- marginal benefit function for the extractive use of groundwater.

- second derivative of the periodic benefit function for groundwater use.
- periodic cost function for supplying potable groundwater at time t.

- stock of water in the aquifer at time t.

- the marginal cost of pumping water to the surface.

- second denvative of the periodic cost function for supplying groundwater

of a given quality at time t.

- the marginal effect of stock on extraction cost.

- fanner's periodic benefit function related input 1at time t.

- the amount of input 1 applied in kg per hectare per year.

- farmer's marginal benefit related input I at time t.

- second derivative of fanner's periodic benefit function related input 1 at

time t.

- units of ernissions (e.g. of residuai nutrients) per hectare.

- onsite disposal (ernissions) function related input 1at time t.

- benefit function for onsite disposal.

- margind benefit of onsite disposal.
- second denvative of the benefit function for onsite disposal.
- the present value of aquifer benefits.

- current value of net gains (benefits - costs) from groundwater use in

perïod t.

- number of privately supplied groundwater extractors.

- Lagrangian expression of value function to be maxirnized.

- net recharge rate to aquifer, defined: precipitation plus r e m flow less

natural discharge.

- the discount factor equal to 1/(1+ discount rate)'

- the Lagrangian muItipIier for the objective function.

- superscript to identiQ case related to municipal extractor.

- superscript to identiQ case related to private extractor.

 Appendix B

The Composition of The User Cost

The procedures used here closely foilow the procedures used by Provencher and Burt

(1993) to denve the user costs associated with the extraction of ground water in a dynarnic

prograrnming problem. OnIy user cost of the self-supplied extractor will be analysed in detail

then the social user cost will be denved.

1 . Private User Cost

By definition the present value of the stock of water at time t+l is represented by the value

function:

Differentiating with respect to x, yields

Equation (2) can be rearranged thus:

Using (3.4) from Chapter 3 and solving for A. ,, we can establish the following relationship

for A,,:

By substituting (4) into the first term in the right hand side of (3) we get:

which can be simplified

If equation (5) is substituted into the last term of equation (3.4) from chapter 3, we would see

that the user cost of a pnvate extractor in time t is equal to (5') below which has four clearty

identifiable components as are presented in Table B 1.

Table B-l The Partitioning of Private User Costs Associated With Extraction

Term (a) is the discounted value of a unit of groundwater to the extractor in period

t + l . The second term (b) is the present value of a unit of water to the extractor in period r+2.

Notice that since the user cost of water in penod t is deterrnined partially by the present value

of a unit of water in penod t+2, then user cost in t+ I is determined partially by the present

value of a unit of water in period t+3 and so onward.

The third term (c) is the present value of savings in pumping costs to this extractor

brought about by an extra unit of groundwater stocks. Because this extractor does not

consider the effect of the extra stock on the pumping cost of al1 other extractors, an

inefficiency which other authors have called apumping extemality is created (Brown and
Deacon, 1972, Burt, 1967, and Provencher and Burt, 1994).

The terrn (d) in Table B 1 is the negative effect of the actions of other extractors on

the d u e of a unit of groundwater to this extractor. As other extractors consume water

without considering the effect of their actions on the value of water to this particular

extractor, the user cost of this extractor is iowered, which reduces the extractor's incentive

to conserve water, Extraction therefore increases in period t, This is cailed the stock

externality. This is consistent with Negri's (1989) work which indicates that when there is

a stock externality the cornbined effect all other competing users reduces the opportunity cost

of current use to the extractor.

B1.2 Sociaily Optimal User Cost

The user cost for a private extractor can be found in the socially optimal outcome,

by following sirnilar steps for pnvate decision. For the social optimum the value of the stock

of water at tirne t t l is:

Differentiating with respect to x, yields

Again, y+,= w&, &+J-New:

Rearranging the right hand side of (7)

From equation (3.14) in chapter 3 we can find At+,,,:

And from Equation (3.15) in chapter 3:

So substituting (9) and (10) into (8) we are left with:

Now the right hand side of (1 1) can be substituted into 3.14 of chapter 3 to yield a more

readily interpreted expression of the user cost at time t:

Note that al1 t e m in the right hand side of (12) are positive indicating that the socially

optimal user costs is higher than the private user costs. The left hand side of equation (12)

indicates that this is the social user cost because it represents sum of the user costs of al1 N+1

extractors.

The components of this social user cost in the right hand side of equation 21 are

surnmarized in Table B2. Term (a) is the discounted social value of a unit of groundwater

to al1 extractors in penod t t l when conserved in period t. Notice that this value is

approprïated by pnvate and municipal extractors only. Component (b) is the present value

of a unit of water to the extractor in period t+2. As was explained in the pnvate solution, this

represents the discounted value of an extra unit of groundwater for all time in the future.

Unlike the pnvate case, the values of al1 users are represent in this term.
Table B-2 The Partitioning of Social User Cost Associated With Aquifer Use

Component Algebraic Expression of Component

The third terrn (c) is the present value of savings in pumping costs brought about by

conserving an extra unit of groundwater stock in period r. Recall that the term dc,+,/dx,,, is
negative, so component (c) will aiways be positive.

In the social solution al1 terms in the social user cost are positive and this indicates

that there d l externalities have been intemalized since each extractor accounts for al1 costs

in Table B2, unlike the case of the private solution. The seif-supplied extractor takes into

account the present value of a unit of water in period t+l to al1 extractors of water (pnvate

and municipal), and for al1 penods after t + l .

 Appendix C

Table C-1
Marginal Cost Avoided Through Onsite Disposal
In Various Corn Farming Systems, and AU Corn Farming Systems Together

Level of Corn Farmin~Systems Cost of Reducing

Onsite Conventional Tillage No Tillage Onsite Disposa1
Disposal CC CSW CCSW CC CSW CCSW by1 kg N/ha
kg Nha $/ha $/ha $/ha $/ha $/ha $/ha $/ha
13.68 83.14 79.09 455.79 54.13 48.51. na 144.1 3
15.20 69.74 66.01 70.47 46-05 43.68 78.37 62.39
16.72 43.16 55.09 41.32 31.98 38.94 43.82 42.39
18.24 26.21 45.78 24.12 27.48 34.29 29.87 31.29
l
19.00 21-12 41 -63 23.74 21.62 32.00 25.40 27.59
I
20.00 17.01 36.56 19.21 17.15 29.01 20.84 23.30
22.50 10.00 25.61 11.45 11.96 21.69 13.19 15.65
r
25.00 5.61 16.54 6.41 8.89 14.58 8.31 10.06
30.00 NA 2.25 0.05 2.70 0.94 2.24 1-64

Adapted from Yindoe (1997) p 159

Notes:
CC = continuous corn rotation
CSW = corn-soybean-winter wheat rotation
CCSW = corn-corn-soybean winter wheat rotation
 TabIe C-2
Marginal Cost Avoided Through Onsite Disposal
In Various Wheat Farming Systems, and AU Wheat Farming Systems Together

Level of W heat Famincl Systems Cost of Reducing

Onsite Conventional Tillage No TiIlage Onsite Disposal
Disposa1 CC CSW CCSW CC CSW CCSW b y 1 kg N h a
kg Nha $/ha $/ha $/ha $/ha $/ha $/ha $ka
13.68 20.48 109.05 na, 8.20 165.20 na 75.73
15.20 31.91 17.78 60.87 6.11 18.58) 30.52 27-63
1 6.72 9.84 6.59 6.63 4.62 7.76 5.76 6.87
1 8.24 7.01 2.49 1.49 3.49 3.63 2.74 3.48
19.00 5.89 1.33 0.44 . 3.02 2.43 2.05 2.53
20.00 4.63 na 2.48 1.29 1.45 2.02
22.50 2.20 na 1 -40 na 0.66 1.42
25.00 0.45 na 0.61 na( 0.27 0.67
1 1 I 1
30.00 na na1 na na1 na na na1

Adapted from Yiridoe (1997) p 160

Notes:
CC = continuous corn rotation
CSW = corn-soybean-winter wheat rotation
CCSW = corn-corn-soybean winter wheat rotation
 Table C-3
Estimation of Marginal Benefit Function For Onsite Disposal
Combined Corn and Wheat Farming Systems

Level of Onsite disposal Marginal Expenditue Avoided

(kg Nha)' ($/kg Nha)
I
13.68 109.93
15.20 45-01

Regression output:
Constant 165.04 (23.63)
Coefficient of onsite disposal -7.1 9 (3.39)
R Squared 0.60
Degrees of freedom 6
Figures in parentheses are standard errors of estimates

-- -

1
Combined average of marginal costs reported in Tables D-1 and D-2.

205
 Appendix D

GAMS Base Program

*Integrated quality-quanûty management mode1

*The Wilmot aquifer region
+Base program
$OFFSYMXREF OFFSYMLIST OFFIJELLIST OFFüELXREF

SET T planning horizon /l*5O/

( T ) initial perîod
TL(T) fina1 period

K category of extractor of water

/ DS domestic self-suppIied
MD municipal domestic
AG agricultural onsite disposal /
9

SCALARS
SC coefficient of storage for aquifer /O. 1%
AREA area of aquifer in m2 radius is 3.5 km or 38.4 mil kms /384825 10/
THETA return flow and a proportion of extraction / O/
LI initial level of lift in metres /22/
HI initial 1eveI of water table bottom to top in metres /105/

EC environmental constraint proportion of aquifer ceiling / I l

CCC cost coefficient of concentration /0.02 18/

FCMTC capital component of marginal treatment cost /0.00 11
DR annual decay rate of nitrates in aquifer /0.5/
THN concentration threshoid for nitrates / 10/
9

PARAMETERS
DSI(T) domestic self-supplied benefit function intercept
/1*50 2.53687 l7/
MDI(T) municipal domestic benefit function intercept
/1*50 2.53687 l7/

ODI(T) one unit on-site disposal domestic benefit function intercept

/1*50 165.044
Pl(T) Price per CU m of alternative water to self suppliers 11*50 5/
P2(T) Pnce per CU m of alternative water to self suppliers /1*50 5/
9

SCALARS
TRM trarnsmissivity value of the aquifer in m2 per day /47561
DUR duration of pumping to establish safe yield in days 1201
rad 1 distance for sake of computation of well extraction point (own well) Il/
rad2 distance of smaller well from major extraction point in metres 1300/
RGDS Rate of growth domestic self supplied 1 O/
RGMD Rate of growth municipal at t 1 01
RGOD Rate of growth domestic self supplied at t / O/
9

PARAMETERS
RATE(T) discount rate 11*5O 0.081
R(T) annual groundwater recharge rate in sq m /1*50 1250000/
VE vertical equivalent factor
BETACT) discount factor in year t
XCAP(T) Maximum value of stock in t CU m
DSU(T) population of domestic self-supplied units at t
MDU(T) population of municipal at t
ODU(T) on-site over which onsite disposal occurs in hectares
* the above represents a percentage of total area of 15400 hr
AQV physical volume of aquifer CU meters height
XI initial quantity of stock in CU m
*
XI = HI*AREA*SC;
VE = AREA*SC;
BETA(T) = (I+RATE(T))**(l
-ORD(T)) ;
AQV = AREA*(LI+HI);
XCAP(T) = SC*AQV;

PARAMETERS
DSCO(T) domestic self-supplied benefit function pnce coefficient
/ 1*50 0,00324673/
MDCO(T) municipal domestic benefit function price coefficient
/130 O.OOl2O7 1/
ODCO(T) on-site disposal domestic benefit function waste coefficient
/1*50 7.1961

DSUI(T) initial population of domestic self-supplied units

/1*50 300/
MDUI(T) scaling factor for municipal benefit fûnction
/1*50 10W/

DSPC(T) Self supply pumping cost per metre of vertical lift dollars per CU m
 /l*5O 0.00071
MDPC(T) municipal pumping cost per metre of vertical lift dollars per CU m
/1*50 0.00071
CCD(T) Marginal capital cost allocation of domestic pumping cost
11*50 0.431
CCM(T) Marginal capital cost allocation of municipal pumping cost
11*50 0.43/

POSITIVE VARIABLE
W l(T) arnount of water per non-municipal household in CU metres
W2(T) amount of municipal water in CU metres

Al (T)amount of water taken by self suppliers from alternative source in CU m

A2(T) arnount of water taken by municipalities from alternative source in CU m

X(T) stock of water in aquifer in CU rn in year t

L(T) Vertical distance for drawing water
W(T) Total water consumption by al1 extractors
OD(T) quantity of on-site disposal in kg of nitmgen per hr or per 10000 sq mtr

MC 1(T) self suppIy variable cost of pumping and treatment at each period
MC2(T) municipal variable cost of pumping and treatment at each penod

NS(T) quantity of nitrate in recharge water mg per cubic metre water

CMN(T) cumulative concentration of nitrates mg per L or p p m
MTC(T) marginal treatment cost for nitrate contamination

FREE VARTABLE
OBJ value of water and on-site disposal in dollars
9

EQUATIONS
MATH parent of OBJ
USECON parent of W water use cannot exceed stock
XMOTION parent of X stock dynamics
XMAX parent of X stock cannot exceed aquifer capacity
STARTX the starting value of X
LIFT parent of L which set the dynamics of water table
STARTL
TOTW parent of W total of ail groundwater extracted
PlMAX parent of MC1 which shows hiIl per unit cost of treatment and extraction
P2MA.X parent of MC2 which shows fidl per unit cost of treatment and extraction
XMIN places a lower bound on water table as an environmental condition
EXONLY on and off switch for OD leacbing

NNS Equation for amount of nitrates entering aquifer per year per
NMOTION equation of motion for nitrate concentration in groundwater
MMTC marginai cost of treating for nitrates per cm
CCMN tirne dependent staternent for cumulative water quality
CCCMN time dependent statement for cumulative water quality
*MBOD common pool condition (switch on margind value) for OD
*MBW 1 common pool condition for selfsupply marginal benefit function extraction
*MBW2 common pool condition for municipal marginal benefit function extraction
*THRES equation establishing discontinuous cost function

*CMNCAP upper limit on cumulative nitrate loading

*WlCAP Upper limit on selfsupply extractions
*W2CAP Upper limit on municipal extractions
9

MATH.. OBJ =E= SUM(T,

DSU(T)*BETA(T)*
( - Pl(T)*Al(T)
DSI(T)*(Wl(T)+Al(T))-DSCO(T)/2*((Wl(T)+AI(T))**2)
-(
L(T)+((.OOO5*MDU(T)*W2(T))~)*log10((2.25*DUR*TRM)/((rad2**2)*SC)) )
*DSPC(T)*WI(T)
- (MTC(T)*WI(T))-CCD(T)*WI(T) )

+ MDU(T)*BETA(T)*
( MDI(T)*(W2(T)+A2(T))-MDCO(T)I2*((W2(T)+A2(T))**2)
- P2(T)*A2(T)
-(
L(T)+((O.O005*MDU(T) *WZ(T))/TRM)*log 10((2.25*DUR*TRM)I((rad1** 2 )*SC)))
*MDPC(T)*W2(T)
- (MTC(T)*WS(T)) -CCM(T)"W2(T) )

*EQUATIONS OF MOTION AND THE MODEL

LIFT(T- l).. L(T) =E= L(T- 1) +(W(T- 1)*(1-THETA) - R(T- 1)) IVE

*
NMOTION(T- l).. CMN(T) 4%CMN(T- 1)*( 1-DR) + NS (T)

MMTC(T).. MTC(T) =E= FCMTC + CCC*CMN(T) ;

*Get some idea of the pumping cost at each stage

P lMAX(T)..
(L(T)+((.OOOS*MDU(T)*W~(T))~)*~O~~~((~.~~*DUR*TRM)/((~~~~**~
)
*DSPC(T) + MTC(T) + CCD(T) =E= MCl(T)

*On off switch for onsite disposal

EXONLY(T).. OD(T) =G=O

* Common pool switches strategy for disposal

*MBOD(T).. ODI(T)- ODCO(T)*OD(T) =E= O
*
* Common pool strategy for extraction set marginal benefits equal to marginal costs
*MBWl(T).. DSI(T) - DSCO(T)*(Wl(T)+Al(T)) =E= MCl(T);
*MBWZ(T).. MDI(T) - MDCO(T)*(W2(T)i-A2(T))-0-2=E= MC2(T);
9

*On and Off switches for upper limits on extraction and onsite disposai
*CMNCAP(T).. OD(T) =L= 15;
*WICAP(T)-. Wl(T)=kSlO;
*Minimum stock constra.int
XMIN(T)., L(T) = L s (HI+LI)*EC

W 1.L(T) = 200; W2.L(T)=4Oû; Oû.L(T)= 10;

POSITIVE VARIABLES
PVW 1(T)
PVW2(T)
PVOD(T)
?

EQUATION
BENWl
BENW2
ODBEN
?

*Caiculate PV annuaily
BENW 1 (T).. PVW 1(T) =E= DSU(T)*BETA(T)*
( DSI(T)*WI(T)-DSCO(T)/2*(Wl(T)**2)-MCl(T)*Wl(T)
)

MODEL PROBLEM the amount of water to consume

SOLVE PROBLEM USTNG NLP MAXIMIZING OBJ;

PARAMETER REPORT Solution Summary;

Report (T, "XW)=X.L(T);
Report (T,"W1 ")=W1 .L(T);
Report (T, "W2")=W2.L(T);
Report (T, "WU)=W.LCT);
Report (T, "OD1')=OD.L(T);
Report (T, "L)=L.L(T);
Report (T, "A1 ")=A1.L(T);
Report (T,"A211)=A2.L(T);

*This wiU display variables 1needed The latter looping exercise is for extemal file
DISPLAY REPORT;

FILE IQQRES1/'REPORT'/;
PUT IQQRES1;
IQQRES 1.PC=5;
PUT // llODll,llXW, llW111, llW211, llwll, ilLw, "Ali#
9 "A2";
 Appendix E

Joint Marginal Cost of Supplying Water

mj
Treatment Cost
m
Pumping Cost

(1) = integnted
approach
(2) = Quantity focus
(3) = Qudity focus
(4) = Separate
approach
(5) = Cornmon pooI
(1 ) (2) (3) (4) (5) approach
Management Approaches
 Table F-1 Socially Optimal Time Path of Stock and Decision Variables
With lncreased Marginal benefit for Water

Year Groundwater SeIf- Municipal Tot al Onsite Depth of

stock supplied extraction groundwater disposal water table
cu.m./yr extraction 000s extraction kg nitrate
cumlyr cu.m./yr nillion cu.m./yr per year metres
 Table F-2 Common Pool Time Path of Stock and Decision Variables
Wlth lncreased Marginal benefit for Water

Year Groundwater Self- Municipal Total Onsite Depth of

stock supplied extraction groundwater disposal water table
CU. m./yr extraction 000s extraction kg nitrate
cu.m.lyr cu.m.lyr nillion cu.m.1yi per year metres
 Table F-3 Quality Focussed Time Path of Stock and Decision Variables
With lncreased Marginal benefit for Water

Y ear Groundwater Self- Municipal Tot al Onsite Depth of

stock supplied extraction groundwater disposal water table
CU. m./yr extraction 000s extraction kg nitrate
cu.m./yr CU. m./yr million cu.m./ytJ per year metres
 Table F-4 Quantity Focussed Time Path of Stock and Decislon Variables
With lncreased Marginal benefit for Water
-
Year Groundwater Self- Municipal Tot al Onsite Depth of
stock supplied extraction groundwater disposal water table
CU. m.lyr extraction 000s extraction kg nitrate
cu.m./yr cu.m./yr nillion cu.m./y[ per year metres
1 Table F-5 Time Path of Stock and Decision Variables: Separate Approach
With lncreased Marginal benefit for Water

Groundwater Self- Municipal Total Onsite Depth of

stock supplied extraction groundwater disposal water table
cu.m./yr extraction 000s extraction kg nitrate
" cu.m./yr cu.m./yr pillion cu.m./yr per year metres
 Glossary

Aqrtichde: a boundary of discontinuity for groundwater rnovement.

Aqttifer yield: maximum rate of withdrawal that can be sustained without causing an
unacceptable decline in the hydraulic head.

Aquqer: a saturated permeable geologic that can transmit si-gnificant quantities of water
under ordinary hydraulic gradients.

Aquitard: a iayer of material tbat prevents orr slows down the vertical movemeot of water
a dn Ieachate,

Coefficient of Storage: the maximum volume pf water an aquifer c m release or taken into
storage per unit surface area of the aquifer per unit change in head, e.g. volume of
water per cubic metre of aquifer. The coefficient of storage for course grained
material in an unconfined aquifer generally lies within the range from 0.01 to 0.3.
If fined gained materials (such as clay or silt are present) the coefficient could be
smaller.

CoefJirient of transmissivi~:(Hydraulic conductivity) x saturated thickness of aquifer.

Conductiviry: rate of flow of water gal/day through cross sectional area with a hydraulic
gradient of I ft.

Discharge: the removal of water from the saturated zone across the water table surface,
together with the associated flow toward the water table within the saturated
zone.(F & S)

Drmvdown: the dept of water table at radial distance from well.

Grortndwater rnining: Pumping groundwater from a basin at a rate that exceeds safe
yield, thereby extracting groundwater which had accumulated over a long penod
of time.

IIydrai~licConductiviîy: the rate of flow of water in cubic rnetres per day through a cross
section of one m2 under one unit of hydraulic gradient. Hydraulic conductivity of
water is determined by the size and shape of pores between rock particles. Fine
particles are associated with hydraulic conductivity.

Hydruulic gradient: change in horizontal distance over vertical distance.

Infiltration: the entry into the soi1 of water made available at the ground surface, together
with the associated flow away from the ground surface within the unsaturated
zone. Generally, it refers to vertical infiltration, where water moves downward
from the soi1 surface.

Overburden: loose soil, silt, sand or gravel overlying bedrock.

Pemeability: the hydraulic conductivity of a rock or the velocity of water moving

through the material. Generally, perrneability increases as follows: gravel, sand,
sandstone, Iimestone/dolomite, shale. But Sand stone with clear fractures is very
productive.

Porosiry: The fraction of bulk volume of a material consisting of pore space.

Recharge: the entry of water into the aquifer's saturated zone at the water table surface,
together with the associated flow away from the water table within the saturated
zone.

Reverse Osmosis (RO): a water purification process that removes organic contaminants,
dissolved solids, and heavy metais from water. The RO System utilizes a thin film
membrane technology to accomplish this. Water is introduced through a
membrane that oniy allows water molecules to pass. Contaminants in the water
cannot get through the membrane, and are drained away as waste water. This is
one of the most effective technologies known for the purification of drinking
water.

Root zone: the subsurface zone extending from the land surface to the maximum depth
penetrated by roots.

Well yield: maximum rate of withdrawal that c m be sustained without lowering the water
level in well below the pump intake.