Economic Analysis of Wetland Development

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An Economic Analysis of Wetland Development and Degradation in the US

Student #2

California State University, Long Beach

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The United States has been experiencing substantial losses of wetlands for hundreds of

years. It has been estimated that over 220 million acres of wetlands existed in the lower 48 states

in the 1600’s. Since then, wetlands have been drained and filled in order to accommodate

infrastructure, agricultural land, water resource projects, housing developments, and other

various uses. Additionally, wetlands have been degraded and lost due to more indirect causes

such as pollution from various sources. The greatest rate of wetland loss occurred between the

1950’s and 1970’s. Although the passing of the Clean Water Act in 1972 in combination with

educational incentives has decreased the rate of loss, the United States continues to lose its

wetlands to both direct and indirect causes. Overdevelopment and degradation of wetlands in the

United States have led to a scarcity of wetlands as well as multiple negative externalities to

humans, wildlife, and the environment that are inaccurately or unaccounted for in development

projects. The existence of wetland scarcity as well as the negative externalities associated with

wetland development suggests a market failure, while the lack of success of current policies

suggests the need for alternative ways of correcting the failure.

Value of Wetlands

According to the US Environmental Protection Agency, wetlands are “areas where water

covers the soil, or is present either at or near the surface of the soil all year or for varying periods

of time during the year, including during the growing season”. They can be found both on the

coasts and inland on every continent except Antarctica. There are many types of wetlands, each

with their own unique vegetation, soil composition, water chemistry, and climate. Some common

types of wetlands include marshes, which can be found inland in arid and semiarid western







regions of the US, and bogs, which can be found in the northeastern and north central US. This

unique habitat provides many benefits and essential services to both wildlife and humans.

Wetlands are home to various species of birds, mammals, amphibians, insects, and plants,

making them one of the most productive ecosystems in the world. Because of their high

productivity, many birds depend on wetlands for food, shelter, nesting, and breeding. The

Belding’s Savannah Sparrow (Passerculus sandwichensis beldingi) is an endangered species that

is endemic to coastal salt marshes in Southern California (“Bolsa Chica Lowlands Restoration

Project”, 2009). This species resides in wetlands year-round, making it completely dependent on

this habitat. Similar to the Belding’s Savannah Sparrow, 138 species out of the 1,900 bird species

that breed in North America are considered to be wetland dependent (Stewart , “Wetlands as

Bird Habitat”, 2014). Migratory bird species such as pelicans, geese, and ducks may not live in

wetlands, but will often stop at wetlands during their migration to rest and eat, making this

habitat crucial to their survival. Many aquatic animals also depend on wetlands for food, shelter,

and reproductive purposes. Vegetation in wetlands provides protection for eggs and juvenile fish,

making them ideal habitats for spawning. Commercial fish such as striped bass (Morone

saxatilis) and even Chinook salmon (Oncorhynchus tshawytscha), generally considered to be the

most delicious salmon, often utilize wetlands to raise their young.

Humans also benefit from the many ecosystem services provided by wetlands. Because

wetlands are home to such a variety of plant and animal life, they are ideal locations for

recreational activities such as photography, hiking, fishing, hunting, and bird watching. These

direct market benefits have generated billions of dollars in the US. In 1995, the US EPA found

that Americans spent $59.5 billion annually on these activities (“America’s Wetlands: Our Vital

Link Between Land and Water”, 1995). This protective habitat also allows commercial fish and







shellfish to reproduce and grow in numbers before being caught for food. In 1991, Louisiana’s

coastal mashes produced an annual commercial fish and shellfish harvest worth $244 billion

(“America’s Wetlands: Our Vital Link Between Land and Water”, 1995). Animals valued for

their pelts such as beavers, mink, and alligators also depend on wetlands. Wetlands also create

indirect market benefits. Factors such as vegetation and microorganisms enable this habitat to

filter out sediment, trash, chemicals, and other harmful pollutants before they can reach open

waters or percolate into groundwater reservoirs. Wetlands are so efficient at filtering water that

in 1990, city managers in Phoenix, Arizona were able to meet wastewater treatment plant

standards by constructing a wetland system to clean discharge water (“Economic Benefits of

Wetlands”, 2006). The same vegetation that helps filter water also helps to reduce the impacts of

flooding and erosion. Roots from the multiple, diverse plants found in wetlands help to hold soil

in place while simultaneously absorbing excess water and distributing it across a larger area

before it can reach more heavily populated regions. A 2008 study found that in the US alone,

coastal wetlands provided $23.2 billion of storm protection services per year (Costanza, “The

Value of Coastal Wetlands for Hurricane Protection”, 2008).

In addition to its many use-values, wetlands also have several non-use values. Many

people derive benefit from simply knowing that wetlands exist, even if they will never visit or

utilize it in any way. This existence value is often joined by bequest value, in which people

derive benefit from preserving wetlands for future generations. Non-used values can be

measured through different methods. Stated preference survey methods such as contingent

valuation can assess an individual’s willingness to pay for a non-market good such as wetlands.









Current Policies

Congress passed the Clean Water Act in 1972 to address the public issue of water

pollution with the goal of restoring and maintaining waterways to be both fishable and

swimmable. Prior to the passing of this act, US waters were poorly maintained and water quality

was very low. Although many people know the Cuyahoga River in Ohio was so polluted with

flammable chemicals that it infamously caught on fire in 1969, many people do not know that it

had previously caught on fire at least 13 times since 1868. The Clean Water Act combines a

technology-based approach with a health-based approach to control the discharge of pollutants

into US waterways.

§301 of the Clean Water Act prohibits point sources from discharging pollutants into US

navigable waters unless a permit is obtained. Point sources are defined as “any discernible,

confined and discrete conveyance” and include virtually any man-made structures that discharge

pollutants such as pipes, ditches, and containers (“Clean Water Act, Section 502 General

Definitions”, 2012). Discharge of pollutants is further defined as “any addition of any pollutant

into navigable waters from any point source”. Although the definition of navigable waters is

often controversial, it is generally understood to be “waters that provide a channel for commerce

and transportation of people and goods (“Navigable Waters”). Wetlands, which may not always

be able to facilitate the transport of people and goods, are also generally considered to be

navigable waters if they are connected to more permanent water bodies that better fit the

traditional definition of navigable waters.

The protective powers of §301 are limited. Although §301 prevents the discharge of

pollutants from many factories, commercial facilities, sewage treatment plants, and other

potentially harmful facilities, agricultural institutions, activities associated with maintenance of







mining roads, and nonpoint sources are largely exempt. Wetlands are limited in their ability to

absorb and filter out water pollutants and can often be overwhelmed if too many pollutants are

introduced. Farmers discharge pesticides as well as excess nutrients in the form of animal waste

and fertilizers, while mining activities discharge sediment and heavy metals like mercury. These

pollutants can cause eutrophication and significant decreases in pH, which are major causes of

water quality degradation in wetlands (“Threats to Wetlands”, 2001). Other pollutants can enter

wetlands through runoff from nonpoint sources. Urban runoff is another major contributor to

wetland degradation. Pollutants from urban land, streets, and parking lots often collect in storm

sewers and find their way to wetlands and other water bodies. Another limit of §301 is its

arguable definition of “navigable waters”. Wetlands are generally considered to be navigable

waters if they are connected to more permanent water bodies. However, many people argue that

a chemical or biological connection to a permanent water body would also classify a wetland to

be a navigable waterway. The interpretation of wetlands being part of a navigable waterway is

subjective, and is often decided by a jury on a case-by-case basis.

§402 of the Clean Water Act establishes the National Pollutant Discharge Elimination

System (NPDES) permit program and regulates point sources by setting effluent limits on the

quantity, concentration, and rate of waste discharged. All point sources must have a NPDES

permit to legally discharge any pollutants. Under the NPDES permit, point sources must abide by

technology-based effluent limitations (TBELs) as well as water quality-based effluent limitations

(WQBELs). Both TBELs and WQBELs are set by the EPA and are based on availability and

efficiency of technology. Although the EPA does not have to consider costs when setting these

limitations, economic feasibility is often taken into account. Dischargers of conventional

pollutants like oil and grease are subject to a specific effluent guideline called best conventional







technology (BCT). Dischargers of nonconventional pollutants like heavy metals and toxic

substances are subject to a different effluent guideline called best available technology (BAT).

These limits are often given in mg/L over a certain amount of time. For example, a municipal

secondary treatment plant may have a TBEL requiring a 30-day average of no more than 30 mg

of total suspended solids per liter of waste discharged.

The protective powers of §402 are also limited. Companies that discharge waste into

navigable waterways are required to self-monitor and self-report their amounts of discharge since

the EPA and other regulating bodies are often too understaffed and underfunded to monitor

companies themselves. This allows polluting companies to exceed the limitations of their permits

while still going unnoticed by enforcement agencies. In 2004, the EPA assessed the water quality

of 29% of the total area of US wetlands and found that 30% of the assessed area was impaired

(“The National Water Quality Inventory: Report to Congress for the 2004 Reporting Cycle – A

Profile “, 2009). Although the total area assessed was only 29% of the total area of US wetlands,

the rest of US wetlands that were not assessed are likely to follow a similar, if not worse, trend.

This is because states have incentive to avoid declaring their waterways as impaired. Wetlands

and other navigable waters deemed to be impaired are subject to stricter, more costly health-

based standards. These standards set a limit on the daily numeric discharge of pollutants that are

found to impair a water body, and often require point sources to significantly reduce their


§404 of the Clean Water Act prohibits the discharge of dredged or fill material in a

wetland without a permit from the US Army Corps of Engineers (USACE). A permit will not be

granted if a less damaging, practicable alternative exists or if the activity will significantly

degrade water quality. The USEPA and USACE can order any illegal development to be stopped







and can even order the site to be restored. Dredge or fill of a wetland without a permit or failure

to comply with the conditions agreed upon in a permit can also result in “civil penalties of up to

$16,000 per day of violation, with a maximum cap of $177,500 in any single enforcement

action” (“Section 404 Enforcement”, 2014).

The protective powers of §404 are significantly limited by voluntary lack of government

enforcement. USACE and USEPA prefer to solve §404 violations through voluntary compliance

rather than criminal enforcement. Because both regulatory groups have limited staff, time, and

funds, they tend to only enforce the most extreme cases. This allows large areas of wetlands to

be illegally developed and degraded without being noticed or enforced.

Market Failures

Normally, companies develop or pollute at the quantity where their private marginal costs

of development equal their private marginal benefits of development. However, development

and degradation of wetlands often results in various direct, unintentional, and uncompensated

negative effects to both humans and wildlife. These negative externalities range from extinction,

habitat loss and decreased reproductive success for the various species of birds, mammals,

amphibians, insects, and plants that depend on wetlands to flooding of nearby residential areas

during storms, increased prices of seafood, and even loss of revenue for businesses associated

with outdoor recreational activities. The federal Clean Water Act does not truly require

companies to take environmental negative externalities into consideration when developing

wetlands or discharging pollutants. This results in a market failure of overdevelopment and

excessive pollution of wetlands. Figure 1 shows that the marginal damage of wetland pollution

and development is upward sloping, meaning that each unit of pollution and degradation is more

damaging than the last. Common wetland pollutants such as heavy metals and excess nutrients







can be classified as flow pollutants because they can be absorbed by the environment. Therefore,

only the amount of discharge at a specific point in time is relevant. Development as a “pollutant”

of wetlands also behaves this way. The increasing marginal damage results in a new social

marginal cost curve with a different slope than the original private marginal cost curve. Figure 1

shows that the social optimal quantity is actually less than the private optimal quantity, and that a

loss of social surplus (deadweight loss) is incurred when polluting and developing at the private

optimal quantity.


Figure 1. Damages from Wetland Degradation and Development. This figure illustrates that development

at the private optimal level goes beyond what is truly optimal and results in a deadweight loss of social


Polluting and developing at the social optimal quantity is more economically efficient

than polluting and developing at the private optimal quantity. Reducing pollution and

development to the social optimal quantity can help avoid damages as well as reduce deadweight


Corrective Future Policies

Future corrective policies will need to encourage pollution and development to occur at

social optimal quantities rather than private optimal quantities. However, real world factors also







need to be taken into consideration. As seen in the flaws of §402 and §404 of the Clean Water

Act, environmentally protective policies are often unenforced and environmental violations are

often unnoticed due to lack of staff and lack of funds. Simply passing more environmentally

protective laws and requiring companies to take environmental externalities into consideration

would not be a truly effective method to correct this market failure. Any future corrective

policies will have to be both enforceable and economically feasible.

A tax set at an appropriate level would not only reduce pollution and development to

social optimal quantities, but would also generate revenue to financially support better

enforcement of current and future protective laws. By setting a tax rate equal to the price

difference between the private marginal cost and social marginal cost at the social optimal

quantity and adding it to the original private marginal cost curve, Figure 2 shows that an

individual company would have the economic incentive to produce at the socially optimal

quantity. Figure 2 also shows that government revenue would be generated in this process, which

could then be used to fund better enforcement of policies.


Figure 2. Revenue from a Corrective Tax. This figure illustrates that an appropriate tax will result in degradation

and development at a social optimal quantity while also generating revenue.







Unfortunately, different companies will have different private marginal cost and private

marginal benefit curves, making it difficult to determine a single optimal tax rate for all wetland

polluters and developers. A tax set at an inappropriate rate can result in deadweight loss to

society or inadequate protection of wetlands. Future policymakers will need to take all these

factors into consideration when developing future rules and regulations.


US wetlands are an undervalued resource that benefits both humans and wildlife. While

providing crucial habitat to various species of birds, mammals, amphibians, insects, and plants,

they simultaneously reduce flooding damages, increase revenue from outdoor recreational

activities, and lower seafood prices. Because they provide these countless benefits, traditional

laws of supply and demand would expect pollution and development of wetlands to become

more expensive as they become scarcer. However, many of these benefits come free of charge,

leaving no direct price mechanism to signal wetland scarcity. This has historically created market

failures where companies polluted and developed more than was socially optimal. Although

current policies such as the Clean Water Act attempt to protect wetlands, they are often

unenforced and do not require any true environmental cost-benefit analysis. Wetlands in the US

are still currently being degraded and developed at an alarming rate, and future policies to protect

them must be both enforceable and economically feasible. Taxes provide the opportunity to

decrease degradation and development to socially optimal quantities while still generating

revenue that can be used to fund better enforcement. Although a tax on degradation and

development is not a perfect solution, it is a method that needs to be considered in the future.











America’s Wetlands: Our Vital Link Between Land and Water. (1995, January 1). Retrieved

April 20, 2015, from

Bolsa Chica Lowlands Restoration Project. (2009, January 1). Retrieved April 20, 2015, from

Clean Water Act, Section 502 General Definitions. (2012, March 6). Retrieved April 20, 2015,


Costanza, R., Pérez-Maqueo, O., Martinez, M., Sutton, P., Anderson, S., & Mulder, K. (n.d.).

The Value of Coastal Wetlands for Hurricane Protection. AMBIO: A Journal of the

Human Environment, 241-248. Retrieved April 20, 2015, from


Economic Benefits of Wetlands. (2006, May 1). Retrieved April 20, 2015, from

Navigable Waters. (n.d.) West’s Encyclopedia of American Law, edition 2. (2008). Retrieved

May 4 2015 from

Section 404 Enforcement. (2014, March 6). Retrieved May 15, 2015, from

Stewart, R. (2014, March 18). Wetlands as Bird Habitat. Retrieved April 20, 2015, from

The National Water Quality Inventory: Report to Congress for the 2004 Reporting Cycle – A

Profile. (2009). Retrieved May 11, 2015, from








Threats to Wetlands. (2001, September 1). Retrieved April 20, 2015, from

What are Wetlands? (2012, October 9). Retrieved May 5, 2015, from


















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