Mitigation of Aquatic Contaminant Hazards – Economic Analysis of Regional Costs and Benefits

Water contamination is a potential health risk with considerable societal costs. Thus, measures that mitigate the risk are generally considered justified. This paper assesses the costs and benefits of such mitigation actions from economic point of view. We use as a case study the artificial recharge system in Kokemäenjoki River in Finland that supplies household water to 300 000 inhabitant Turku region. Realization of water contamination risk is likely to have consequences on the regional economy. Large scale water contamination would adversely affect the health of the population in the receiving region. Our approach is to partition the problem in two phases: 1) prevention of risk – the decision for the level of mitigation measures and 2) actualization of risk – adjustment during the hazard (or lack of it) and subsequent recovery. The first phase represents the cost side of the analysis – the foregone consumption that is needed for the productivity enhancing mitigation investment. The second phase is for measuring the benefits – what is the benefit of an investment, the avoided disruption in economic activity. The major pathways of economic consequences are carried through reduced labor productivity in the region due to increased amount of sick leaves and through increased demand for the health care services. These direct economic effects induce higher order effects that affect regional and industrial economic equilibria. Further complication is the dynamic nature of the problem. Therefore, a dynamic regional general equilibrium assessment seems suitable tool for analysis. We use dynamic regional AGE model VERM as the main tool of our study. In the model we apply monthly time periods in order to model the short duration hazard accurately. We also apply excess capacity of capital to account for restricted adjustment possibilities at the very short run.