Contingent Valuation of Some Externalities from Mine

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Pumping is expected to continue during the projected 15-20 year period of mining operations in the basin .... In 1992, after several years of drought, Rye Patch was completely drained by the PCWCD, eliminating the ...... ($132 - $330). $172.06.
Contingent Valuation of Some Externalities from Mine Dewatering By Eric J. Huszar1, Noelwah R. Netusil2, and W. Douglass Shaw3 Abstract: We assess the economic impacts of some externalities from mine dewatering using the discrete choice version of the contingent valuation method (CVM). "Dewatering" refers to the pumping of groundwater from areas surrounding mines. Our focus is on the dewatering being conducted by the large open-pit gold mines located in the Humboldt River Basin (HRB) of Northern Nevada and its downstream impacts. Results indicate that in the short term the mines have created a positive externality for downstream parties. In the long term downstream impacts may be negative, but upstream “pit lakes” will be created that may have some value to users, depending on the lakes’ quality. 1 Huszar: Economist, U.S. Department of Agriculture, Animal and Plant Health Inspection Service, Policy Analysis and Development, 4700 River Road, Unit 119, Riverdale, Maryland 20737. (future contact author) E-mail [email protected] 2 Netusil: Associate Professor, Dept. of Economics, Reed College, 3203 SE Woodstock Blvd., Portland, Oregon. 97202-8199 E-mail [email protected]. 3 Shaw: Associate Professor, Department of Applied Economics & Statistics, University of Nevada, Reno, Nevada 89557. E-mail [email protected]. Key words: Mine dewatering, watershed impacts, contingent valuation, double-bounded logit 1

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INTRODUCTION In this paper we assess the economic impacts of some externalities from mine dewatering

using a discrete choice version of the contingent valuation method (CVM). "Dewatering" refers to the pumping of groundwater from the area surrounding the mine pit. Our focus is on the dewatering currently taking place in the Humboldt River Basin (HRB) of Northern Nevada and, in particular, its downstream impacts.1 The CVM is often used to obtain values for a public, or nonmarket good. Though the CV method has been criticized on various grounds, obtaining values from it is supported by microeconomic theory, and recent studies that compare the CVM to other valuation methods suggest that it can be used to obtain reasonable estimates of value (see for example, Carson et al. 1996). A telephone survey was conducted to collect information on the preferences and values Nevadans have for certain surface water impacts that are currently occurring, and others that may occur in the future, as a result of mining activities. Stated preference methods were used to obtain values for changes in the resource since valuation methods such as the travel cost method (TCM) cannot be used to obtain passive or “nonuse” values. 2 We expect our estimates reflect primarily use values, that is, benefits derived from “using” resources in the study area (e.g., enhanced recreation opportunities, additional water for irrigation, additional wildlife habitat for viewing) although respondents are also likely to have nonuse values. Discrete or dichotomous choice CV

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This analysis is part of a larger study of these impacts. See Huszar (1999), Netusil et al. (1998), who describe pretest survey results, Lambert and Shaw (1999), who implement a programming model of some of the impacts, and Huszar et al. (1999), who use revealed preferences to estimate a travel cost model of water-based recreation at a reservoir on the Humboldt River. 2

Huszar et al. (1999) estimate the recreational value for one reservoir in the HRB using the TCM.

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techniques are used to evaluate individual responses and predict the sample mean willingness to pay (WTP) for programs affecting water quantities in the HRB. Prior to presenting the model, data, and results, we provide a context for the analysis by describing the study area and the process of open-pit gold mining. We discuss how some of the modeling and results can be applied to future Western water quantity issues. 2.

BACKGROUND Nevada ranks first in U.S. gold production and third in world production, accounting for

7.4% of total world output in 1996 (NBMG 1997). Gold mining generates gross revenues that are second only to the Nevada casino industry and wages that are higher than any other sector in the state. As such, any valuation of impacts that relate to mining activities is controversial, as environmental and other impacts will be pitted against the high economic benefit of jobs created directly or indirectly by the mining sector. The open-pit gold mines mainly use a "heap leach" extraction process. This involves repeatedly spraying a diluted cyanide solution over ore that has been placed (heaped) onto impermeable pads. The cyanide solution dissolves the gold into a solution that is collected and processed. The amount of gold per ton of rock removed is quite small - ranging from .015 to .06 of an ounce per ton in the study area. This means that vast quantities of dirt must be removed resulting in pits that are up to a few miles wide with depths that extend hundreds and even, for some mines, more than 1,000 feet below the land surface. The mining companies received temporary and conditional property rights to approximately 445,000 acre-feet (a.f.) of the State's unappropriated groundwater for each year of

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mining operations by filing a series of claims with the Nevada State Water Engineer during the 1980s and early 1990s. Although other users of the state’s surface and groundwater resources must provide evidence of water rights corresponding to withdrawals, as well as evidence of active beneficial use of the water, the mining industry was ruled exempt from meeting these requirements. Nevada's State Water Engineer has sole responsibility for all appropriations in the State and has established acceptable methods for disposing of groundwater pumped by the mines (other details may be found in Lambert and Shaw 1999). These are, listed in order of preference, (1) reinjection; (2) storage in infiltration ponds; (3) irrigation for agricultural production; and, finally, (4) discharge into surface channels. In 1998, the four major open-pit gold mines in the HRB pumped approximately 189,000 acre feet (a.f.) of water from the area around their pits (Discharge Monitoring Reports 1998). Pumping is expected to continue during the projected 15-20 year period of mining operations in the basin although rates will depend on the cumulative amount of water pumped and world gold prices. In 1998, approximately 61% percent of pumped water, 115,000 a.f., was discharged either directly into the Humboldt River or into its tributaries after being treated to meet Nevada drinking water quality standards (Discharge Monitoring Reports 1998). In economic terms, mine discharges would be worth approximately $864 million each year at current urban market prices of about $3000 per a.f. in Reno, the nearest major city to the Humboldt basin.3 Once mining ceases, the pumps that keep the pit walls dry will be turned off to avoid the cost of pumping and those pits that are below the groundwater table will fill with water, creating

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This is a somewhat artificial value since there is no distribution system at present that could move the water to Reno or any city with a large “urban” population.

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"pit lakes." The quality of water in the pit lakes is uncertain (Myers 1994; Shevenell et al. 1998), but the water should be of sufficient quality to allow for recreational uses (fishing and swimming) although it will probably not meet Nevada drinking water standards (Shavenell et al. 1998). When filled it is estimated that the pit lakes will contain one million a.f. of water approximately four times the total storage capacity of all existing reservoirs on the Humboldt River (State of Nevada 1992). While cyanide contamination from open-pit gold mining and pit lake water quality remain issues of interest, we focus exclusively on water quality issues in this paper.4 The research area and topic make for an extremely difficult survey environment. While the magnitude of the dewatering activity may be unprecedented, it has gone largely unnoticed by Nevada citizens until quite recently. This may be due to several factors. First, Nevada's population is small, and the lack of a state income tax leads to scant state budgets to support basic hydrologic research. Nevada is also one of the most “urbanized” states in the United States. Approximately 68 percent of Nevadans live in or near Las Vegas (Nevada State Demographer 1999), which is geographically distant from the study area, and a proportionate amount of state resources may be spent on issues there, leaving the HRB largely unstudied. Very little is known about the aquifers near the mines (Plume 1995), and only recently have surface water impacts in the HRB been addressed. Second, the dominant industry in the HRB is gold mining, and while the mines obtain

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In June of 1997 18,000 gallons of cyanide solution spilled into a tributary of the Humboldt River, producing concentrations of 12.9 parts per million (ppm). The Nevada drinking water standard is .2 ppm of cyanide. When diluted by Humboldt flows, the concentration of cyanide fell to about .07 ppm (Associated Press 1997). In this case, the increased Humboldt River flows helped protect water quality.

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leases on public lands in the region, they are private companies that are required to disclose only select information to the public. Third, while the majority of the state is managed by the Bureau of Land Management and other agencies, the largest area with a high density of privately owned land is in the HRB. Northern Nevada is home to the "Sagebrush Rebellion," a resource and lands privatization movement popularized under the Reagan Presidency. While one might expect private property owners to be concerned about mining impacts, few concerns have been raised. This may be because of private land holders distrust of the government and/or the lack of property rights to the water being pumped and discharged. Finally, the region is heavily dependent on the high-wage jobs provided by the mining industry. Despite the small population, conflicting interests over water and water resources exist in the HRB. Nevada has a history of water disputes between local interests and the federal government (see for example O'Leary's (1994) discussion of the Stillwater Wildlife Refuge issue). Humboldt River water rights are primarily held by agricultural users, and like most Nevada surface waters, the river is over-allocated.5 All HRB water rights holders’ needs are generally met in “average” water years, however, junior rights holders, including in-stream uses, have often faced shortages in low water years. The historic volatility in flows may be mitigated by current gold mining activities in the basin although long-term average water flows may decline below their pre-mining levels as a result of current and future mine dewatering in the basin. A substantial amount of the water discharged by the mines into the Humboldt River or its

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Numerous researchers have examined the impacts of the doctrine of prior appropriation in the semi-arid Western United States and resulting inefficiencies (eg. Colby 1988 and Zilberman et al. 1994).

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tributaries ends up in Rye Patch Reservoir. The reservoir, with a storage capacity of approximately 179,000 acre-feet, is a popular recreation site that draws about 67,000 visitors per year. Water from Rye Patch is used by members of the Pershing County Water Conservation District (PCWCD) to irrigate crops in the Lovelock area. The PCWCD claims to have established a legal right to the water stored at Rye Patch at the time the dam was built. In 1992, after several years of drought, Rye Patch was completely drained by the PCWCD, eliminating the opportunity to fish, boat, camp, and swim at the site. Though someone in the state might have brought suit against a public official for not protecting the public interest, no one did, and this action has left a legacy of bitterness for some parties. In summary, the mines are acting to provide a current, and perhaps mostly positive externality that is especially beneficial to the downstream junior water rights holders, as well as providing instream flow benefits to Rye Patch users. The long-term consequences, like those from global warming, carry a large degree of uncertainty, but it is clear that unless some program is adopted to continue pumping, large pit lakes will form once the mining companies cease operations. If long-term flows do decline below their pre-mining levels, windfall losses will accrue to both irrigators and recreators as future water supplies will be insufficient in many years to satisfy irrigator demands and sustain a viable sport fishery. The value of ground and surface water has been considered before (see Douglas and Taylor 1999 or Berrens et al. 1996 for a summary presentation of related values), and the valuation issues surrounding the impacts of dewatering may be related to other studies.

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3.

THE MODEL The model we use follows the discrete choice literature and the referendum question

format and seeks values for "programs." Individuals can choose to support a program, or not. In our application, we consider two programs. The first program would continue the pumping and discharge of water at 1997 levels into the Humboldt River after the mines close. The second program assumes that the first fails and that pit lakes form after the mines close and pumping ceases. The second program focuses on improving quality at the resulting pit lakes to allow for recreational uses such as fishing and swimming. The classic articles on the single response discrete choice CV model show that the yes/no responses can be connected to the random utility model (Hanemann 1984), or more simply as a latent variable model underlying a true willingness to pay measure (Cameron 1988). Cameron's interpretation is based on the consumer cost, or expenditure function. Microeconomic theory underlying both approaches was reviewed and assessed by McConnell (1990), who concludes that the deterministic models of Hanemann (1984) and Cameron (1988) are dual to each other. He notes that the stochastic models of Hanemann and Cameron, especially with the assumption of nonconstant marginal utility of income, are not generally duals to one another, and advises against inclusion of endogenous right-hand-side (RHS) variables in the referendum models. The double-bound (Hanemann et al. 1991) and multiple-bound (e.g., Welsh and Poe 1998) extensions of the single response framework may improve statistical efficiency by assuming that one true WTP underlies any referendum response. The alternative assumption of

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correlated WTP responses may lead to bivariate models (see Cameron and Quiggin (1994) for an example). The use of the dichotomous choice CVM is widespread and the double bounded version of this approach is now frequently implemented (see for example, De Young (1997)). Despite the recommendations of the now famous NOAA panel report (Arrow et al. 1993), whether the dichotomous choice approach is "better" or "worse" than other formats is an empirical issue that likely varies from study to study (visit the issue in Ready et al. (1996), for example). In addition, while the NOAA panel's recommendations might be important for litigation because they were offered in the context of natural resource damage assessment, some of the recommendations might be overly restrictive in other valuation contexts. As will be seen, the telephone survey was designed to collect information using a doublebounded format. However, because of communication problems, the first group of respondents was not asked the follow up bid amounts. This was discovered and corrected, but only after almost forty percent of respondents had completed the survey. Therefore, we report the single bound model results for everyone, and compare the double to the single bound for the smaller subgroup. The likelihood function for the single response model uses the cumulative density function F('x) evaluated using the variables that explain acceptance (yes) or rejection (no) of the opportunity to purchase the program. The usual approach is to derive the CDF assuming errors follow the extreme value distribution, leading to use of the logit model. Assuming y = 0 corresponds to a no response and y = 1 corresponds to a "yes" response, the likelihood function is represented by:

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Prob(Y = y) =

 [1 - F(  ' x )]  F(  ' x ) i

y i=0

1

i

y i=1

Hanemann's Random Utility Model (RUM) framework suggests that an individual's decision to support the program or not is primarily a function of explanatory variables (x) that change with and without the program. These are mainly the environmental conditions with and without the program and income with and without the payment being made. However, most researchers include explanatory variables that do not vary depending on adoption of the program, but may vary across individuals. The double bounded model makes use of information provided from both the first and the second bid. As emphasized by some newer research, this structure supposes that one true WTP underlies both responses the individual makes. Respondents may provide one of four paired answers: yes/yes; yes/no; no/yes; and no/no. If the first response is yes, a bid higher than the first bid is presented, and the respondent can answer yes to this higher second bid, or reject it. Similarly, if the first response is no, the respondent is presented with a lower second bid that can be accepted or rejected. Let Ai represent the first amount presented, AU the higher second amount, and AL the lower second amount. Using this notation as well as the previous (yes = 1 and no = 0) we can derive the following likelihood function following Hanemann et al. (1991):

L=



y 1=0 y 2=0

F( AL )



y 1=1 y 2=0

[F( AU ) - F( Ai )]



y 1=0 y 2=1

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[F( Ai ) - F( AL )]



y 1=1 y 2=1

(1 - F( AU ))

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Equation (2) implies that the true WTP can be bounded from either direction, depending on the first and second responses, that is, the true WTP can be between an accepted (rejected) bid amount and a rejected higher (accepted lower) bid amount, etc. This is clearly explained, with a simple presentation of the likelihood function, by Kanninen and Khawaja (1995). More formally (see Hanemann 1984), if F( ) is the c.d.f. for the differences between errors underlying random utilities, then the probability of accepting the bid is equal to the c.d.f. evaluated at the change in the conditional indirect utility function between the with program (accept) and without program (reject) states. Assuming the linear conditional indirect utility function, the change is: v = (  o -  1 ) + A

(3)

This form, which is typically used in applied valuation work, allows for no income effects, that is, it assumes that consumers' surplus does not vary with income. We would typically assume that income effects exist for normal goods. This assumption is an empirical issue, but it is perhaps defensible for normal goods that constitute a very small fraction of the total budget. The assumption that there are no income effects is tantamount to assuming the good is neutral, that is, neither normal nor inferior (see McConnell 1990).

4. PROGRAMS CONSIDERED The Humboldt watershed is full of complex resource issues. In light of concerns about embedding or nesting of values (Kahnemann and Knetsch 1992 or Smith 1992), questions were

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carefully phrased to focus respondents on one narrowly defined good to be valued. Since little or no information on groundwater impacts near the mines is available, the analysis focused mainly on general downstream surface water impacts from dewatering that are currently taking place. Surface Flow Enhancement The first program considered maintains river flows at 1997 levels by continuing to pump and discharge water into the Humboldt River. This quantity of water would benefit people downstream of Carlin by providing water supplies for agriculture and recreation opportunities at Rye Patch Reservoir and similar spots along the river. The quality of the water would be the same as the water being discharged in 1997, that is, it would be treated to meet Nevada drinking water quality standards. The full text of this question is provided in Appendix A. Twenty different bid amounts were used ranging from $3-300 for the surface flow enhancement program; depending upon the initial response the bid amount was either doubled or decreased by half for the follow up bid amount. The bid arrangement was formulated from the pre-test results (Netusil et al. 1998). We informed respondents that the program would only be established if a majority of Nevada voters agreed to support and fund the program. Respondents were also told that if the program was adopted, all persons in Nevada would have to pay to support the program. This link of the program to a majority rule “vote” is stated as being incentive compatible under the NOAA panel's recommendations. The overall actual total cost of the program (continued pumping of water into the Humboldt to maintain flows at 1997 levels) was unavailable until after the survey was

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completed. Therefore, the total actual program cost was not presented to the respondent when he or she was asked to participate in the program. Information on pumping costs did, however, became available after the surveys were completed. These costs are estimated to be approximately $1 million per month or more for the large open-pit gold mines in the HRB (Scheidig 1999). This reflects operating costs and not the initial capital outlay of approximately $1.5 million per well. Omission of such information may have an effect on the program participation and, ultimately, the WTP bid. Bohara et al. (1998) test the omission of program total cost empirically and conclude that while omitting the cost of the project may bias an open-ended survey format, no biases are present if cost information is omitted from the dichotomous choice format. The authors attribute the importance of cost information to the behavior of respondents who they conclude approach these survey formats in fundamentally different ways. As our survey format is dichotomous choice, we do not think our total cost omission fatally damages our CVM application. Focus group work indicated a great mistrust of government dealings with water quality and quantity issues and, because Nevada has no state income tax, we were concerned that some Nevadans who are anti-government and anti-tax would reject any tax policy out of protest. The wording of the referendum question is therefore constructed to specify a one-time payment vehicle that would be voted in (such as a trust fund), if a majority of Nevada voters agreed to support the project.

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Pit Lake Creation The second program relates to the maintenance and development of pit lakes. In the first “pumping” program we hypothesize that individuals have values for maintaining current conditions for a variety of reasons associated with use, expected use, or passive use. The first program, however, must fail for the second program - the creation of a fund to support pit lake use in the future - to be viable. Following the end of the series of questions about the first program, respondents were asked by the telephone interviewer to assume that the program to maintain current flows fails to pass a majority vote. They were then asked if they would be willing to pay a certain amount to visit a pit lake created by the year 2018. The exact text of the question that respondents were asked to answer is provided in Appendix A. Ten different bid amounts were formulated ranging from $1-30 for the pit lake creation program based on pretest results. This scenario is fraught with many of the same difficult issues as underlie valuation of climate change impacts, because of the timing of the impact. Individuals in both a climate change and this pit lake scenario face impacts in the future. In both situations the individual respondent, as well as the experts, may be uncertain about when and how much the impact will affect activities. The specification of the explanatory variables follows the discussion of the survey and data.

5. THE SURVEY AND DATA The survey design was a long process that started by convening focus groups early in 1997. These focus group meetings were held mostly in the HRB, in the towns of Elko,

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Winnemucca, and Lovelock, and also Reno, the largest city in northern Nevada, which is located west of the HRB. These meetings were used to ascertain the importance of various resource issues, do some fact-finding, and to design a mail survey questionnaire. The mail survey was pretested on a random sample of Nevada households to determine any difficulties; results are reported in Netusil et al. (1998). Several problems were discovered with the mail survey format, but the major concern was the low response rate (23%). Households in Nevada are exposed to large volumes of junk mail, probably heightening the propensity to throw away mail unopened. In addition, the State has a low literacy rate. On the positive side, the pretest indicated that a majority of respondents were willing to pay some positive sum of money annually to offset the negative long-term impacts from mine dewatering. Based on the challenges presented by the mail survey, we decided to recruit a random sample of Nevada residents for a telephone survey using random digit dialing. Respondents were provided with a chance of winning money for completing the survey questionnaire with the hope that this would increase response rates (see Willimack et al. 1995). If a resident agreed to participate, he or she was mailed an informational brochure that describes the study area, the process of open-pit gold mining, and issues related to dewatering. This allowed the brochure reader to understand these complex issues and to become comfortable with providing certain types of information during the telephone survey. The telephone survey questionnaire was kept as short as possible while still collecting essential information to minimize the possibility that a respondent would fail to complete an interview.

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Sampling and the Final Sample The overall budget for the project precluded a huge initial recruitment effort, so a stratified sample of households across the entire state was implemented. Information (contacts, completed calls, refusals, etc.) on the recruitment effort is provided in Table 1. The sample was stratified so that approximately 65% of the sample was composed of northern Nevada residences, 24% from the middle of the state, and the remaining 11% from southern Nevada. The most important reason for using a stratified sample was to avoid over-sampling Southern Nevada, which contains the majority of Nevada's population; the majority of people in Southern Nevada would not be familiar with the Humboldt River Basin. In total, 447 respondents completed the telephone survey questionnaire (Table 2), but only 269 of these were given the survey with both follow-up bids. While small in comparison to some CVM studies, this sample is representative of the population who care about HRB resources. In the initial screening, very few residents of Southern Nevada, which contains the vast majority of the population, were interested in participating in the study. The participation refusal reasons given were mainly that the respondent: 1.) "Doesn't do interviews"; 2.) "Doesn't give out information on the telephone" 3.) "Has no interest in the subject"; or 4.) "Has no time for this." This suggests great care is necessary in extrapolating results from the sample to any Southern Nevada population.

Data Characteristics

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Responses were checked for completeness of information, consistency, and evidence of "protest" behavior prior to estimating the referendum models. Each question was treated separately when cleaning the data and those responses deemed unreliable were dropped. Of the 447 observations for the single-bounded surface flow enhancement question, 9 were dropped. Twenty-six observations were also dropped from the 269 observations for the double-bounded surface flow program question. Finally, cleaning resulted in 2 observations being dropped from the single-bounded pit visitation program, leaving 293 observations. A table of descriptive statistics is given for the explanatory variables in each of the above programs in Table 3.

6. RESULTS Results for the single and double-bounded models for the enhanced surface flow program are given in Table 4. All valid observations are used to estimate the single-bounded model, but because of the omitted second bid for some respondents, only a portion of the full sample can be used to estimate the double-bounded model. Therefore, sample sizes differ for the models presented in Table 4. The McFadden Pseudo R2 provides a goodness of fit measure for the single-bounded models while the goodness of fit measure is modified, as suggested by Kanninan and Kawaja (1995) and Herriges (1999), for the double-bounded model. An alternative way to measure overall fit is to compare the actual frequencies of yes answers for particular bids to the mean predicted probabilities for those same bids. The single bound model for the full sample underpredicts the actual frequency of yes responses (55 versus 58 percent) at bids of $80. For the full sample, a dummy variable for whether the individual thought he or she might

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want to provide the surface flow enhancement for others (bequest) is positive and significant. Respondents were asked how much confidence they had that the pumping program would actually work (1 = little to 7 = very confident), and whether if put to an actual referendum vote in Nevada, this program would pass (1 = yes). Both variables have the expected positive signs and are significant in the models. The mean score for whether respondents believed the pumping program would actually work is 4.11, indicating a medium degree of confidence. Of the 438 total observations, more than 130 households reported a confidence score of 5, and well over 210 reported 5 or higher.6 A direct comparison of the double and single-bound models can be done using the smaller number of individuals receiving the double-bounded format. The results are presented in columns three and four, where N = 243 for both models. The bid and the confidence in the pumping program are the two explanatory variables. The double-bounded version of the model results in a much lower mean WTP than the single-bounded model by almost one-third. The single-bounded model appears to overpredict the probability that individuals will say yes to a bid, as evidenced by this probability when the offered bid is $100. Efficiency is improved using the double-bound model, based on the calculations of the 95 percent confidence intervals. For this the Krinsky-Robb (1986) procedure is followed, and the interval is much smaller on the double bounded specification of the model.

Pit Lake Program

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We noted above that reality is that a pumping program would perhaps be quite difficult to achieve because of the high total actual cost of pumping, but neither we, nor the respondents, had this information at the time.

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The single referendum model is estimated for the pit lake program, as opposed to the double-bounded model, because respondents were asked one bid question rather than two to prevent survey fatigue toward the end of the surveying period. Results are reported in Table 5. Confidence in the pit lake program's success was fairly strong. The mean confidence level for the 293 respondents (using a 1 to 7 scale) was 5.09 with approximately one-third of respondents reporting a score of 5. The WTP can be interpreted as a per-trip value for future access to a recreational resource. Similar to the other program, respondents were asked whether if put to an actual referendum vote, the pit lake program would pass (1 = yes). This variable has the expected positive sign and is statistically significant. The 95 percent confidence interval indicates reasonable accuracy for this estimated value.

Total Values: Extrapolation to the Population We assume that impacts related to mine dewatering affect Nevada residents only since the depletion of the aquifer impacts current and future residents of the basin. Additionally, the extra water discharged into the Humboldt benefits recreators who are primarily from the basin and downstream irrigators. Even to obtain the total value for all Nevada residents and to compare these to actual program costs requires several assumptions and raises some difficult issues. Using the double-bounded mean value of approximately $60 for the program to maintain flows at their current (1997) level, the first program would probably not collect enough money to continue pumping groundwater for delivery downstream even if every one of Nevada’s 677,880

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households paid this amount.7 Again, even though the respondents did not know total pumping costs, we assume this would not have effected the discrete choice bids (Bohara et al. 1998). It can also be argued that not all Nevada households care about this issue, and that applying the mean from the sample to all households is inappropriate. The Las Vegas area has an estimated population of 1.34 million persons, or 68 percent of the total state population (Nevada State Demographer 1999). If we assume that all households in Clark County have a zero value for the program, the total value of the first program drops to approximately $13.8 million dollars. This implies that the surface flows might be worth a lot to Nevada households that are potentially impacted, but that their total value is not enough to cover total actual pumping costs. The failure of the program to maintain Humboldt River flows at their current level makes the HRB pit lake program more likely and relevant. Recall that under this second program respondents were asked if they would be willing to pay a specific dollar amount into a fund that would be used to develop one pit lake for recreation purposes by 2018. A forward-looking person is assumed to take the timing of pit lake access into account. Predicting the future use of a pit lake accurately is beyond the scope of the model, since this would require an estimate of users and their frequency of use. However, an existing regional lake (Rye Patch Reservoir) currently draws around 67,000 recreators per year (Huszar et al. 1999). If this figure is a reasonable estimate of use, and if we assume each person takes one trip per year, then the value of pit lake access in the future is $1 million dollars. This sum of money appears to be ample to fund actual improvements to allow access to the pit lakes that will start to form once the mines cease

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Using the 1990 census number of persons per household, and the 1998 estimate of the number of persons in Nevada, yields 677,880 households. Multiplying by $50 per household yields about $34 million.

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operations. In summary, the sampling strategy was designed with the assumption that households outside the state of Nevada are not in the affected population. This is a strong assumption, particularly when resources are being used to produce gold for the entire world. The stratification of the sample also assumes that households nearest the HRB are most affected. Pretests did confirm that the most geographically distant counties, which are also the most heavily populated counties in Nevada, showed little concern for HRB resources.

Comparison to Existing Literature Values The surface flow enhancement value is a one-time bid, and the pit lake program scenario elicits a per-trip recreation access value. Comparing our values to other surface water values reported in the literature is difficult because of differences in study methods, water measurement units, context, etc. Much of the literature reports annual values for surface flows that are part of a multi-year payment program. Mean values that correspond to a study eliciting an annual value, paid every year for five years, might be expected to be lower than our study's one-time mean WTP. However, the one-time mean WTP for the double bounded model of $63 falls between Berrens et al. (1996) value of $28 for protection of surface flows in the Middle Rio Grande and their top figure of $90 for protection of instream flows in 11 New Mexico rivers. In present value terms, all these are reasonably compared with Loomis (1987) instream value range of $15 to $74 per acre-foot of water. To translate the one time WTP we obtain into a "per acre-foot" value would require a somewhat artificial calculation, taking the one-time value and dividing by

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the number of additional acre-feet being secured by the flow program. This would result in very small values per acre-foot compared to the Loomis range, but comparisons like these are not appropriate. One issue arising from multiple year payments is discounting, that is, whether individuals being asked to pay money five years in the future discount the future value of their payment when accepting or rejecting the offered payment. Another issue is whether other valuation studies elicit a "marginal" value of water, that is, a WTP for one additional acre-foot. Depending on the baseline conditions or the perceived value of the marginal unit, the value could vary a great deal. For example, Douglas and Johnson (1993) note that some values for water might relate the productive contribution of additional streamflow to catching more fish - a narrowly defined value. Per-day, or per-trip recreational values can be flawed in theory and should therefore be carefully interpreted, but they are very common in the literature. Our question asks whether a person would be willing to pay a dollar amount for access at some specified time in the future. Assuming existing studies produce meaningful per-trip values, our value of $15 per-trip is a bit low, but certainly not completely out of line with the $20 to $100 range of per-trip values for water-based recreation (lakes, ponds, rivers) in the recreation literature (eg. Walsh et al. 1990). The $15 per-trip value is still not exactly comparable to values from studies that obtain current per-trip values for water-based recreation, because we are asking about future access. The pit lake program might be better viewed as seeking an option value, which has a degree of uncertainty associated with it. If the probability of a visit is less than one, then this may reduce

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the per-trip value, explaining why the pit lake program value is lower than values reported in the literature. However, if a respondent discounted the future value to think about whether she or he would pay the present value equivalent, the $15 is perhaps not much lower than current reported values for recreational access. For example, the closest lake nearby, Rye Patch Reservoir, currently charges a $6 per-day access fee (Huszar et al. 1999). The estimated value of $15, twenty years into the future, discounted at a five percent rate, is worth about $ 5.51 in current dollars.

7. CONCLUSIONS We have attempted to assess some of the economic impacts of current and future externalities from mine dewatering using the CVM. In today’s climate of litigation and highstakes valuation, CVM has come under extreme scrutiny and a major criticism has been that CVM instruments are not incentive compatible. One reaction has been to do enormously costly CVM studies, funded either by private industry such as the major oil companies, or a branch of the Federal government devoted to environmental protection. Our study is quite modest in what it cost to implement, and therefore it cannot and should not be compared to CVM studies that cost millions of dollars. Our study sheds light on the issue of dewatering externalities, and we have obtained meaningful results that have some policy relevance. These findings should be very helpful in guiding future research dealing with water quantity changes due to dewatering. If a program to enhance surface flows fails, which is likely, especially in light of recently uncovered information about total pumping costs, pit lakes will be created, and a program will be needed to

23

make them accessible to the public. Pumping costs in the neighborhood of $1 million per month indicate that the total value of the surface flow program is not large enough to make a pumping or flow enhancement program successful. A program to make pit lakes available for recreation has a higher likelihood of success. Accurate information is not currently available from existing research in the physical sciences, namely hydrology, biology, chemistry and ecology, to support and more fully develop the economic analysis. However, like climate change research, some research on mine dewatering and pit lake water quality is currently underway and it appears that there is new interest in these issues on the part of Nevada residents, state and local governments, and federal government agencies. Many of the issues we have examined should be revisited with better data from the physical sciences, and the entire issue of groundwater impact should be examined if and when data on aquifers become available.

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Acknowledgements: The authors want to thank Glenn Miller, Susan Lynn, Tina Nappe, Bennie Hodges, Mike Baughman, Paul Scheidig, Graham Chisholm, and Matt Holford for their participation in pretest survey design. Trudy Cameron generously contributed to the survey design, and Joe Cooper, John Loomis, Steven Yen, and Scott Shonkwiler graciously provided us with some helpful comments. We also thank participants in seminars at the Universities of Edinburgh and York, and the Queen's University of Belfast; and particularly Nick Hanley, Sue Chilton, and George Hutchinson. We owe special thanks to Kerry Smith, who shared many important thoughts and ideas about CV modeling with us. Marlene Rebori and Loretta Singletary helped greatly by moderating focus group meetings. Dr. Shap Wolf and others at the Arizona State University Survey Center helped develop and conducted the telephone survey that generated the data. Major funding for this project came from the EPA/NSF Partnership for Environmental Research: Water and Watersheds Program. Ideas conveyed within this manuscript, as well as any remaining errors, are the sole responsibility of the authors.

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APPENDIX I: REFERENCES Arrow, K.; R. Solow; E. Leamer; P. Portney; R. Radner; and H. Schuman. (1993). "Report of the NOAA Panel on Contingent Valuation." Appendix I, Fed. Reg. 58, 4602-13.

Associated Press. (1997). "High Waters, Diversion Creek, Contain Mine Spill." Reno Gazette Journal, Tuesday June 17th.

Berrens, R.; P. Ganderton; C. Silva. (1996). “Valuing the Protection of Minimum Instream Flows in New Mexico.” J. Agri. Res. Econ. 21(2), 294-308.

Bohara, A.K.; M. McKee; R. Berrens; H.J. Smith; C.L. Silva; and D.S. Brookshire. (1998). “Effects of Total Cost and Group-Size Information on Willingness to Pay Responses: Open Ended vs. Dichotomous Choice.” J. Environ. Econ. Manage. 35(2), 142-163.

Colby, B. (1988). "Economic Impacts of Water Law - State Law and Water Market Development in the Southwest.” Nat. Res. J. 28(4), 721-749.

Cameron, T.A. (1988). “A New Paradigm for Valuing Nonmarket Goods Using Referendum Data: Maximum Likelihood Estimation by Censored Logistic Regression.” J. Environ. Econ. Manage. 15(3), 355-79.

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Cameron, T.A. and J. Quiggin. (1994). “Estimation Using Contingent Valuation Data from “Dichotomous Choice with Follow-Up” Questionnaire.” J. Environ. Econ. Manage. 27(3), 218-34.

Carson, R.T.; N.F.Flores; K.M. Martin; J.L. Wright. (1996). "Contingent Valuation and Revealed Preference Methodologies: Comparing the Estimates for Quasi-Public Goods." Land Econ. 72(1), 80-99.

Cooper, J.C. (1997). “Combining Actual and Contingent Behavior Data to Model Farmer Adoption of Water Quality Protection Practices.” J. Ag. Res. Econ., 22 (1), 30-43.

De Young, C. (1997). “A Statistical Analysis of the Double-Bounded Contingent Valuation Method: A Comparison of Two Surveys.” Unpublished MS thesis, College of Agriculture and Forestry, West Virginia University.

Discharge Monitoring Reports. (1998). Barrick Goldstrike, Lone Tree Mine and Santa Fe Gold Corporation. Reports on file at the Bureau of Water Pollution Control, Nevada Division of Environmental Protection, Carson City, NV 89710.

Douglas, A.J. and J.G. Taylor. (1999). "Nonmarket Valuation Research." Forthcoming in International J. Environ. Studies.

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Douglas, A.J. and R. Johnson. (1993). "Instream Flow Assessment and Economic Valuation: A Survey of Nonmarket Benefits Research." Intern. J. Environ. Studies, 43, 89-104.

Herriges, J. (1999). "Measuring Goodness of Fit for the Double-Bounded Logit Model: Comment." Amer. J. Agr. Econ. 81(1), 231-234.

Hanemann, W.M. (1984). “Welfare Evaluations in Contingent Valuation Experiments with Discrete Responses.” American Agricultural Economics Association, 15, 332-341.

Hanemann, W.M.; J. Loomis; B. Kanninen. (1991). "Statistical Efficiency of Double-Bounded Dichotomous Choice Contingent Valuation." Amer. J. of Agr. Econ. 73(4), 1255-63.

Huszar, E. (1999). “Economic Values of Mine Dewatering in Northern Nevada” Unpublished MS thesis, Department of Applied Economics and Statistics, University of Nevada, Reno, 89557.

Huszar, E.; W.D. Shaw; J. Englin; N. Netusil. (1999). Recreational Damages from Reservoir Level Changes. Water Resources Research, 35(11), 3489-3494.

Kahneman, D. and J.L. Knetsch. (1992). “Valuing Public Goods: the Purchase of Moral

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Satisfaction.” J. Environ. Econ. Manage. 22(1), 57-70.

Kanninen, B.J. and M.S. Khawaja. (1995). "Measuring Goodness of Fit for the Double-Bounded Logit Model." Amer. J. of Agri. Econ. 77(4), 885-890.

Krinsky, I. and A. Robb (1986). "Approximating the Statistical Properties of Elasticities." Rev. of Econ. and Stat. 68(4), 715-719.

Lambert, D. and W.D. Shaw. (2000). “Agricultural and Recreational Impacts from Surface Flow Changes Due to Gold Mining Operations in Nevada.” J. of Agri. and Resource Econ., 25 (No. 2 - December): 533-546.

Loomis, J.B. (1987). “The Economic Value of Instream Flow: A Review of Methodology and Benefit Estimates for Optimum Flows.” J. of Environ. Manage. 24(2), 169-79.

McConnell, K.E. (1990). "Models for Referendum Data: The Structure of Discrete Choice Models for Contingent Valuation." J. Environ. Econ. Manage. 18(1), 19-34.

Myers, T. (1994). “Cumulative Hydrologic Effects of Open Pit Gold Mining in the Humboldt River Drainage.” Consulting Report to the Sierra Club, Reno, NV 89512.

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Netusil, N.; E. Huszar; W.D. Shaw; C. Leversee. (1998). “Potential Economic Impacts of Mine Dewatering in the Humboldt River Basin: Preliminary Survey Results.” Proceedings of the Annual meetings of the Univ. Council on Water Resources, Hood River, OR.

Nevada Bureau of Mines and Geology. (1997). " The Nevada Mineral Industry: 1997." Nevada Bureau of Mines and Geology Special Publication MI-1997.

O'Leary, R. (1994). "The Bureaucratic Politics Paradox: The Case of Wetlands Legislation in Nevada." J. Public Admin. Res. Theory 4, 443-67.

Nevada State Demographer. (1999). “Nevada Population Estimates for Counties, Cities, and Unincorporated Towns.” University of Nevada – Reno, Reno, NV 89557.

Plume, R.W. (1995). “Water Resources and Potential Effects of Ground-water Development in Maggie, Marys, and Susie Creek Basins, Elko and Eureka Counties, Nevada.” U.S. Geological Survey, Water-Resources Investigations Report 94-4222.

Ready, R.; J. Buzby; D. Hu. (1996). “Differences Between Continuous and Discrete Contingent Value Estimates.” Land Econ. 72(3), 397-411.

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Scheidig, Paul. (1999). Telephone interview with Noelwah Netusil. 14 July.

Schulze, W.; G. McClelland; D. Waldman; J. Lazo. (1996). “Sources of Bias in Contingent Valuation.” In The Contingent Valuation of Environmental Resources: Methodological Issues and Research Needs David J. Bjornstad and James R. Kahn (eds.) Edward Elgar, Brookfield.

Shevenell, L.; K.A. Connors; and C. Henry. (1998). "Water Quality at Sixteen Open Pits in Nevada." NBMG Open-File Report 98-1, Nevada Bureau of Mines and Geology.

Smith, V.K. (1992). “Arbitrary Values, Good Causes, and Premature Verdicts: Comment.” J. Environ. Econ. Manage. 22(1), 71-89. Smith, V.K. (1999). “Of Birds and Books: More on Hypothetical Referenda.” J. of Pol. Econ. 107(1), 197-200.

State of Nevada, Department of Conservation and Natural Resources. (1992). Nevada Water Facts. Nevada Division of Water Planning. Carson City, NV 89710.

State of Nevada, Division of Water Resources. (1999). “Preliminary Pumpage Figures for Major Mines in the Humboldt River Basin.” Carson City, NV 89710.

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Walsh, R., Johnson, D.M., and J.R. McKean. (1990). “Nonmarket Values from Two Decades of Research on Recreation Demand.” In Advances in Applied Micro-Economics, A. Link and V.K. Smith (eds.), Greenwich, CT: Jai Press Inc.

Welsh, M.P. and G.L. Poe. (1998). "Elicitation Effects in Contingent Valuation: Comparisons to a Multiple Bounded Discrete Choice Approach." J. Environ. Econ. Manage. 36(2), 17085.

White, H. (1982). "Maximum Likelihood Estimation of Misspecified Models." Econometrica 50(1), 1-25.

Willimack, D.K.; H. Schuman; B. Pennell; J.M. Lepkowski. (1995). "Effects of a Prepaid Nonmonetary Incentive on Response Rates and Response Quality in Face-to-Face Surveys.” Public Opinion Quarterly 95(1), 78-94.

Zilberman, D; N. Macdougall; F. Shah. (1994). "Changes in Water Allocation Mechanisms for California Agriculture." Cont. Econ. Policy, 12(1), 122-33.

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Appendix II: Contingent Valuation Questions Program 1: Surface Flow Enhancement Suppose that legal arrangements can be made to continue pumping water into the Humboldt River the same way the mines did during 1997. This would continue to benefit people in the area by providing reliable water supplies for agriculture and recreation opportunities at Rye Patch Reservoir and similar spots along the river. The quality of the water would be the same as 1997. This project could only happen if a majority of Nevada voters agreed to support a fund that will be used to pay the pumping costs. If this was adopted, all persons in Nevada (not just you) would have to pay to support the program, but each would only have to pay once into this fund. How this would be funded would be decided as part of the program. If the program is not approved, agriculture and recreation in the basin will depend on the usual changes in flows due to weather patterns that have taken place over the years. Because the mine pits will fill with water, flows may be even less than their historic average levels. If the program is not approved, water that the mines had pumped will stop flowing into the Humboldt River, and agriculture and recreation in the basin will depend on the usual changes in flows that have taken place over the years. Because the mine pits will fill with water, flows may actually be even less than their historic average levels. Keep in mind your after-tax household income last year and the fact that you probably already pay something for the water you use in addition to your usual household expenses like

33

housing, food, clothing, transportation, vacations, etc. Would you be willing to pay ${X} as a one time payment to maintain the Humboldt River flows at 1997 levels?

Possible Answers: Yes/No/ Don’t Know

Program 2: Pit Lake Creation

Thank you for thinking about that first program. Next, I want you to think about another program that might be proposed if the pumping program wasn't approved by Nevada voters. After the mines close and stop discharging water into the Humboldt River, the pits the mines have dug will full up with water, creating pit lakes. This alternative program would make pit lakes available for recreation - such as swimming and sunbathing - by the year 2018. This lake would be about 20 miles north of Carlin, off of Interstate 80. There would be swimming and wading, but boating would not be allowed. Water quality would be safe for swimming and would support wildlife that visit the lake. This program would only be put in place if it was supported by a majority of Nevada's residents.

Possible Answers: Yes/No/ Don’t Know

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The next nearest lake is Rye Patch Reservoir, which charges for entry. Assume the entry fee at Rye Patch twenty years from now will be $6 per day. Would you be willing to pay ${X} per day, to use this new pit lake?

Possible Answers: Yes/No/ Don’t Know

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Table 1: Recruiting Data Partial Ring, but no Interviews – answer and selected and busy calls interview was begun, but broken off

Region of NV

Total Number of Telephone Numbers Included in Sample

Completed Calls

Refused

Response Rate

Northern Nevada

812

340

131

0

341

41.87%

Middle Nevada

473

138

108

1

226

29.18%

Clark County

254

69

78

1

106

27.17%

Total

1,539

547

317

2

673

35.54%

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Table 2: Interview Data Partial Ring, but no Interviews – answer and selected and busy calls interview was begun, but broken off

Region of NV

Total Number of Telephone Numbers Included in Sample

Completed Calls

Refused

Response Rate

Northern Nevada

335

292

9

2

32

87.16%

Middle Nevada

134

108

7

2

4

80.60%

Clark County

67

47

10

1

9

70.15%

Total

536

447

26

5

58

83.40%

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Table 3: Descriptive Statistics Single Referendum Double Bound Model (Surface Flow) Model (Surface Flow) N = 438 N = 243

Single Referendum Model (Pit Lake) N = 293

Mean

S.E.

Mean

S.E.

Mean

Contribute a specified $ amount (1 = yes, 0=no)

0.54

0.50

0.55

0.49

---

---

Contribute a higher/lower specified $amount (1=yes, 0=no)

---

---

0.48

0.53

---

---

Contribute a specified $ amount (1=yes, 0=no)

---

---

---

---

0.63

0.48

Bequest desire

0.79

0.40

0.78

0.42

---

---

Source of Water (Municipal = 1)

0.62

0.48

0.54

0.49

0.61

0.48

Confidence in Pumping/Pit Program (1 =little, 7 = very confident)

4.11

1.65

4.12

1.67

5.09

1.58

Would vote for pumping/Pit program pass? (1 = yes)

0.47

0.49

0.53

0.50

0.76

0.42

Initial Bid Amount

76.14

71.97

77.04

73.84

7.9

6.92

Step up Bid Amount

---

---

88.73

105.7

---

---

Variables

S.E.

Dependent Variables

Independent Variables

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Table 4: Referendum Models for Surface Flow Enhancement Variables1

Single Referendum Model N = 438

Single Bound Model N = 243

Double Bound Model N = 243

Constant term

-1.70 (0.542)***

-1.07 (0.38)***

-1.52 (0.389)***

Bequest desire

0.313 (0.212)

Source of Water (Municipal = 1)

0.545 (0.269)**

Confidence in pumping program (1 to 7)

0.319 (0.072)***

0.434 (0.088)***

0.619 (0.08)***

Would vote for pumping program pass? (1 = yes)

.890 (0.221)***

Bid amount

-0.005 (0.001)***

-0.006 (0.002)***

-0.021 (0.002)***

Log likelihood at convergence

-257.99

-147.18

-270.22

McFadden Pseudo R2

0.15

0.12

Modified3 Pseudo R2 Probability of Yes at bid = $100 Willingness to Pay Mean 95% C.I.2

0.072 .518

.516

.25

$182.88 ($132 - $330)

$172.06 ($119 - $383)

$62.80 ($52 - $77)

30

1

White's standard errors (1982), robust to misspecifications, are in parentheses below the parameter estimate. *** indicates one percent significance, * is ten percent.

2

The Krinsky-Robb procedure for estimating the 95 percent confidence interval is used.

3

The McFadden Pseudo R2 provides a goodness of fit measure for the single-bounded models while the goodness of fit measure is modified, as suggested by Kanninan and Kawaja (1995) and (Herriges 1999), for the double-bounded model.

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Table 5: Pit Lake Program Model Results Variables1

Single Bound Referendum (N = 293)

Constant

-.091 (0.522)*

Source of Water Used (Municipal = 1, 0 = other)

0.828 (0.288)***

Pit Program Confidence Scale (1 = little, 7 = very confident)

0.235 (0.086)***

Do you think a vote for Pit program would pass? (1 = yes, 0 = no)

.957 (0.319)***

Bid Amount

-0.115 (0.021)***

Log Likelihood at convergence McFadden Pseudo R2

-161.34 0.177

Probability of saying yes at $10

.59

Mean willingness to pay an entrance fee 95 % Confidence interval2

$14.91 ($12-$19)

1

White's standard errors, robust to misspecifications, are in parentheses below the parameter estimate. *** indicates one percent significance, * is ten percent.

2

The Krinsky-Robb procedure for estimating the 95 percent confidence interval is used.

32

33