External costs of water pollution in the drinking water supply sector

Nitrate pollution from agricultural production is a major threat to water resources worldwide. This study quantifies the consequences of groundwater nitrate pollution for the drinking water supply sector by estimating the effect of groundwater nitrate pollution on the costs of water utilities. In doing so, we contribute to the estimation of the external costs of agricultural nonpoint pollution associated with drinking water supply. Empirical evidence is based on fixed effects regressions using large panel data sets on water supply companies and groundwater sampling sites in Germany. Local nitrate pollution at the abstraction plant is approximated using spatial interpolation. Our findings reveal that water suppliers incur substantial costs through groundwater nitrate pollution in terms of increased treatment and total costs. The estimated cost elasticities range from 0.048 to 0.052 for treatment costs and up to 0.019 for total costs. For an average firm, these estimates imply annual increases in treatment and total costs of <euro>39,000 and <euro>116,000, respectively, for a 10 milligrams per liter increase in groundwater nitrate concentrations.