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December 1, 2008
Series Editor: Ian Parry
Managing Editor: Felicia Day
Assistant Editors: John Anderson and Adrienne Foerster

Welcome to the RFF Weekly Policy Commentary, which is meant to provide an easy way to learn about important policy issues related to environmental, natural resource, energy, urban, and public health problems.

In recent years, the traditional system of federal environmental regulations has been supplemented with a variety of programs requiring firms, or local authorities, to disclose information on their environmental record. The main objective of these programs is to encourage better environmental performance, without imposing a large administrative burden on the federal government. In this week’s commentary, Lori Bennear and Sheila Olmstead provide an overview of “right-to-know” legislation in the context of safe drinking water. They also summarize their recent research on the effectiveness of the program at reducing the prevalence of contaminated water.

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Information Disclosure and Drinking Water Quality

By Lori Snyder Bennear and Sheila Olmstead

 Tap Water   In the United States, nearly 270 million people (about 95 percent of the population) obtain piped water from regulated community drinking water systems. The quality of drinking water from these community systems, which may serve anywhere from 25 to several million people, is regulated by the federal government under the Safe Drinking Water Act (SDWA). The SDWA regulates chemical, microbiological, radiological, and physical drinking water contaminants by enforcing 90 different maximum contaminant levels (MCLs), which limit the amount of contaminants that can legally be present in drinking water. For some pollutants, the SDWA also establishes treatment protocols that must be followed to reduce contamination.  

U.S. taxpayers heavily subsidize compliance with the SDWA. Between 1995 and 2003, Congress appropriated $1 billion each year for grants and below-market loans to states (which then distribute funds to water supply systems) for treatment and distribution infrastructure improvements. Nonetheless, U.S. community water systems incur tens of thousands of SDWA violations each year. For example, between 1997 and 2003, U.S. water suppliers incurred about 9,900 violations per year of the total coliform rule—the main rule governing the presence of bacteria in drinking water and the most frequently violated MCL.

In 1996, the SDWA was amended, mandating, among other things, that community drinking water systems disclose information about such violations to their consumers every year, in a standard format called a consumer confidence report (CCR). This report must provide information on the source of drinking water, any detected contaminants (even if levels are within legal limits), and any violations of drinking water standards. The CCRs were first issued in 1999, reporting violations from the 1998 calendar year. While all community water systems must compile a CCR, the method of distribution to consumers varies by system size. Suppliers serving 10,000 or more people must mail their CCR directly to households. Those serving more than 100,000 people must mail their CCR and make it available online. In contrast, suppliers serving fewer than 10,000 households must post a hard copy of the CCR in a public place and make it available on request, but they are not required to mail it.

The CCR rule was one of many environmental “right-to-know” provisions enacted during the 1980s and 1990s. The primary public policy goal of these “right-to-know” rules is to provide the public with important information about environmental quality and health. But information disclosure requirements can be seen as de facto direct environmental regulatory instruments—that is, the requirement to disclose information about environmental performance may induce improvements in environmental performance.

Our recent research suggests that information disclosure may actually accomplish this goal. In analyzing whether community water suppliers in Massachusetts incurred fewer water quality violations when they were required to issue CCRs to their customers, we examined trends in violations separately for large suppliers that are required to mail their reports and for smaller suppliers that must only compile the data and make it available to households upon request. There is strong evidence that those water suppliers required to mail CCRs directly to customers had lower violations after the CCR rule took effect. The magnitude of this effect is quite significant. On average in Massachusetts, large water suppliers violated the SDWA about once every two years before 1998. Mailing CCRs reduced total violations for this group by between 30 and 44 percent, and reduced more serious health violations by 40 to 57 percent.

Proponents of “information as regulation” argue that there are at least three mechanisms through which information disclosure might affect environmental quality. The first is the market mechanism. If information about firms’ environmental performance is known by consumers, investors, or employees who value environmental performance, firms can face market pressure to improve. The second is the political mechanism; people may use the political system to lobby for more stringent regulation, or to protest particular production practices. Finally, information disclosure programs can affect the internal decisionmaking of an organization. The act of measuring and reporting data on environmental performance may itself generate internal changes at firms that lead to improvements in environmental performance.

While our research does not directly test any of the three mechanisms, our results are consistent with the hypothesis that the political mechanism is at work. Water suppliers required to directly mail CCRs may experience, or expect to experience, a political response and may respond by lowering violations. We would not expect the market mechanism to work in this case. There is essentially no market through which consumers can respond to information, aside from either moving to a different town (a high-cost response) or purchasing bottled drinking water, a substitution that would have only a minimal impact on demand, because drinking water comprises a tiny fraction of household piped water consumption in the United States. The internal mechanism is unlikely, as well; water suppliers are already required to monitor and report any violations to the state, so compiling these data for their customers provides no new information to the supplier.

 

Shelia Olmstead

Sheila Olmstead
is an associate professor of environmental economics at Yale University’s School of Forestry and Environmental Studies. Much of her research focuses on water resource economics and policy, including urban water demand management, market-based approaches to water conservation, drinking water quality regulation, access to drinking water among low-income populations, and the efficient allocation of water across sectors. 

Lori Snyder Bennear
Lori Snyder Bennear is an assistant professor of environmental economics and policy at Duke University’s Nicholas School of the Environment.  Her research focuses on evaluating the effectiveness of innovations in environmental regulatory policy.


The evidence suggests that information disclosure requirements associated with the 1996 amendments to the SDWA resulted in substantial decreases in drinking water violations among regulated water suppliers. In this context, mandatory information disclosure complements, but does not supplant, existing pollution control regulations. However, recent research in developing countries suggests that consumers also respond to information disclosure, potentially improving health outcomes by substituting toward safer water supplies. These behavioral changes occur even in the absence of mandatory water quality standards. Clearly, information disclosure can be a useful complement to more traditional environmental regulatory instruments in some settings; further research is necessary to determine whether it may also serve as a substitute for these regulations.

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Views expressed are those of the author. RFF does not take institutional positions on legislative or policy questions.

To receive the Weekly Policy Commentary by email, or to submit comments and feedback, contact
comments@rff.org.

Additional Resources:

Bennear, L. S. and S. M. Olmstead. 2008. The Impacts of the “Right to Know:” Information disclosure and the regulation of drinking water quality. Journal of Environmental Economics and Management 56(2): 117–130.

Jalan, J. and E. Somanthan. 2008. The Importance of Being Informed: Experimental evidence on demand for environmental quality. Journal of Development Economics 87: 4–28.

Johnson, B. 2003. Do Reports on Drinking Water Quality Affect Customers’ Concerns? Experiments in report content. Risk Analysis 23: 985-998.

Madajewicz, M., A. Pfaff, A. van Geen, J. Graziano, I. Hussein, H. Momotaj, R. Sylvi, and H. Ahsan. 2007. Can Information Alone Change Behavior? Response to arsenic contamination of groundwater in Bangladesh. Journal of Development Economics 84: 731–754.

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