Economic valuation of drinking water quantity and quality: A literature review

Report, 2021

This literature review is a part of the research project Risk-based prioritization of water protection in sustainable spatial planning (WaterPlan), funded by the Swedish research council Formas. The aim of the project is to enable well-informed analyses and prioritization of measures for protecting water sources as a part of future urban development. One key to prioritization is knowledge about the economic values of drinking water quality and quantity. The purpose of the literature review is therefore to map earlier studies of such values, and to use this mapping for (a) evaluating the opportunities to transfer results from earlier studies to a Swedish setting, and (b) learning from earlier experience how potential new primary valuation studies in a Swedish setting could be designed.

The literature review allowed some main valuation situations among the studies to be identified. Based on these different situations, the following rough categorization of studies was performed:

i. Improvements in water quality/quantity (10 studies)
ii. Preservation of water quality/avoiding water quality deterioration (5 studies)
iii. Avoiding quantity restrictions/ensuring stable supply (6 studies)
iv. WTP to reduce risks to drinking water sources (5 studies)
v. Meta and benefit transfer studies (8 studies)
vi. National valuation studies (6 studies)

The report includes a listing of all identified studies according to this categorization.

The results from the literature review indicate that there is a lack of suitable value estimates to allow for benefit transfer to Swedish conditions to evaluate the drinking water service in relevant policy scenarios. It is therefore concluded that new valuation studies might be needed for fulfilling the objectives of the WaterPlan project.

One possible approach for carrying out new valuation studies is to follow the demand function approach. This approach is therefore reviewed, but it is found that the approach entails some important weaknesses for the case of Sweden. One important reason is that there is not an actual well-functioning market for drinking water in Sweden. The report therefore also reviews the use of stated preference studies for valuing drinking water quantity and quality. This review indicates experiences that can be helpful in the development of new valuation studies in Sweden which follow the stated preference approach.