The Economic Value of Water Quality

Ed. Note: Water enhances property value; no surprise there. Surprising is the direct correlation between specific indicators of quality water and higher property value: if you have loons for neighbors, or live near an non-acidic mountain lake, your property is likely worth more, according to Clarkson University’s Martin Heintzelman. His creative analysis of ecological, chemical and economic data for the Adirondacks reveals correlations that could have national implications at a time when environmental protection is viewed in many quarters as an unwise investment. Martin prepared this summary for Watermark based on his working paper, “A Loon on Every Lake: An Hedonic Analysis of Lake Water Quality in the Adirondacks,” written with Carrie Tuttle, research assistant professor at Clarkson.

Loon Lake, Adirondack Mts.  ©Doug Lemke, via Shutterstock, used with permission.

Loon Lake, Adirondack Mts. ©Doug Lemke, via Shutterstock, used with permission.

The effects of acid rain and mercury contamination in the Adirondack Mountains are significant. The Adirondacks are especially susceptible to acid and methylmercury deposition because of their high precipitation, soil composition, and location downwind of coal-fired power plants in the Midwest (Acid Rain in the Adirondacks, Jenkins et al., 2007). The Adirondack Lakes Survey Corporation has determined that 25% of the lakes in their sample are acidified and 80% have low acidification neutralizing capacity (ANC) making them sensitive to further acidification. What makes these numbers especially striking is that many of the lakes in their sample are located in relatively isolated state-owned areas of the Park that are protected from development.

The Clean Air Act (CAA) established National Ambient Air Quality Standards(NAAQS) at both primary and secondary levels. The estimated impacts of the 1990 CAA amendments on sulfur dioxide and nitrogen oxides through 2010 are an additional 16.3 hundred ton per day reduction in SO2 and 18.3 hundred ton per day reduction on NOx. The economic value of the reductions for all the NAAQS parameters is estimated to be $110 billion, primarily the result of avoiding illness and premature death from health effects caused by air pollution (U.S. Environmental Protection Agency 1999). In 2011, the U.S. EPA issued the Mercury and Air Toxics Standards (MATS), the first standards for power plant emissions of Mercury. These regulations will drastically reduce emissions of Mercury, and our study provides some evidence on the potential benefits.

There is an 11% premium for properties located near a lake with loons; a 20- 25% premium for homes near non-acidic lakes.

Our study uses data on residential transactions in the Adirondack Park between 2001 and 2009 in conjunction with water quality and other ecological data and property characteristics to perform a hedonic analysis that explores the relationship between lake water quality, ecological indicators, and property values. In particular, we look at the effects of lake acidity, the presence of the Common Loon, and whether or not lakes have been invaded by Milfoil. We find significant impacts, in various specifications, from each of these factors.

We find that there is an 11% premium for properties that are located near a lake that has loons. This result fits nicely with anecdotal evidence that potential buyers often query realtors about the presence of loons on a lake when they are considering purchasing a lake home in the Adirondacks. With that said, it is not clear whether loons are desired because of their natural beauty, unique tremolo, or because the loons are a sensitive species that buyers may see as a proxy for overall lake health, although our analysis suggests that there is a premium for loons even controlling for acidity and invasive Milfoil.

Common Loon.   John Picken, Chicago, USA [ CC-BY-2.0 ],  via Wikimedia Commons

Common Loon.  John Picken, Chicago, USA [CC-BY-2.0], via Wikimedia Commons

We also find a premium, of between 20 and 25%, for homes near lakes known to be non-acidic. Given the long history of acid deposition in the Adirondack Park, lakes which are non-acidic during our study period are presumably less likely to become acidic in the future and may be demonstrating a natural resilience. Since pH may not be widely known by potential buyers, it may be surprising to see such clear results, especially given our obvious data limitations. However, acidification impacts individual species of aquatic plants and animals, disturbs the aquatic food web, and affects the entire lake ecosystem (Baker and Christensen 1991Driscoll et al. 2003Jenkins et al. 2007).

Lakes with low pH are likely to have less biotic diversity including having fewer fish, amphibians, and other species which are readily observable by potential home buyers. Since we are unable to include comprehensive data on the abundance of fish species, and since non-acidic lakes are likely to support healthier and more numerous fish populations, this may be a large driver. Fishing is a major recreational activity in the Adirondack Park. It is also the case that acidity is likely to be correlated with the presence of Mercury (Simonin et al. 2008Brown et al. 2010), which we are unable to include, but which is highly toxic to humans and ecosystems and is highly prevalent in the Adirondacks.

Homeowners in the Adirondacks are being financially impacted by air pollution generated outside the Adirondack Park.

We find some limited evidence that the presence of milfoil negatively impacts property values, on the order of about 6%. Interestingly, we find this result when milfoil is included in analyses with loons and acidity, and only when we use the full sample of homes. If we run the analysis with just waterfront homes, the presence of Milfoil does not have a significant effect. Importantly, we are only observing the presence of Milfoil at the lake level, so that all parcels on an invaded lake are counted as such, but it may be that only portions of some lakes are invaded, especially for the larger lakes.

One reason for this is that the most common vector for the transport of invasive species, including Milfoil, is boats (Rothlisberger et al., 2010), and, anecdotally, Milfoil invasions are most common in the vicinity of public boat launches (Hilary Smith, Director, Adirondack Invasive Plant Program, personal communication, May 13, 2014). Thus, our estimates of the effect of invasion may be biased towards zero since some parcels may be on an invaded lake while not actually being directly impacted by that invasion. It seems possible that this effect may be especially relevant for waterfront parcels where an invasion out one’s back door is likely to be considerably more important than one down the lake near the public beach, for instance.

Our results clearly demonstrate that homeowners in the Adirondacks are being financially impacted by air pollution that is generated outside of the park, perhaps lending support to the argument that the Mercury and Air Toxics Standards and other regulations are needed to protect more sensitive and ecologically diverse areas such as the Adirondacks. Through the adoption of more stringent controls on sulfur, nitrogen and mercury emissions, pollution in the Adirondacks should decrease, resulting in fewer acidic lakes, impaired water bodies, and more lakes with loons, fish and aquatic diversity. Similarly, our results provided some limited support for efforts to reduce the spread of Milfoil to otherwise unaffected lakes as we see some evidence that such invasions do harm property values

In the current economic climate, funding for conservation measures is heavily scrutinized and some policy makers argue that environmental protection is too costly to sustain. Through a deeper understanding of the value of conservation in the Adirondack Park, policy makers may be better equipped with the tools needed to communicate the importance of these programs and to more accurately and fully evaluate their costs and benefits, including often neglected externalities. If property owners know how water quality affects their personal investment, they may be willing to self-fund initiatives to prevent the spread of localized detriments like aquatic invasive species. Moreover, the residents of the Adirondacks may be willing to implement more protective measures to maintain loon breeding habitat, protect biodiversity, and minimize anthropogenic impacts which make the Adirondacks a truly unique public/private park.