MGMT 8415M Week 7 Externality Case Example

Nitrate in the Neighbors' Wells: An Externality Case Following a Vegetable Plant's Wastewater From Spray Fields Into a Township's Private Wells, Sizing the Cost, Separating What the Permit Covers and Stating the Residual Duty

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Walden University

MGMT 8415M: Socially Conscious Leader

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Month Day, Year

Nitrate in the Neighbors' Wells: An Externality Case Following a Vegetable Plant's Wastewater From Spray Fields Into a Township's Private Wells, Sizing the Cost, Separating What the Permit Covers and Stating the Residual Duty

How the Cost Leaves the Firm

Sawyer Creek's Ellery plant washes, blanches and freezes vegetables from June through October, producing large volumes of wastewater rich in organic matter and nitrogen. Like many vegetable processors in sandy parts of Wisconsin, the plant treats this wastewater by spraying it onto about 600 acres of company-owned and leased fields, where crops and soil take up part of the nitrogen. The rest can leach as nitrate through sandy soil into the shallow groundwater that supplies private wells in the surrounding township. The plant pays for pumping and spraying. It does not pay for the nitrate that moves beyond the fields, which reaches households whose wells draw from the same aquifer.

Sized, With Its Uncertainty

In 2024 the county health department offered free nitrate testing to households within two miles of the spray fields. Of 46 private wells tested, 14 exceeded the federal drinking water standard of 10 milligrams of nitrate-nitrogen per liter, and another 11 fell between 5 and 10. Wells upgradient of the fields mostly tested below 3. The affected population is about 40 households, roughly 110 people, including an estimated 9 households with infants or pregnant residents.

The health concern is established. Ward et al. (2018), reviewing the evidence, described the risk of methemoglobinemia in infants that led to the current standard and summarized studies linking elevated nitrate in drinking water to other outcomes, including some cancers and adverse birth outcomes, while noting that evidence for many of these is mixed and that effects below the standard remain uncertain.

The cost borne by affected households can be estimated in rough terms. A point-of-use reverse osmosis system for drinking water costs about $1,200 to install and about $250 a year to maintain. Deepening or replacing a well to reach cleaner water costs roughly $15,000 to $25,000 and may not succeed. For 14 households above the standard, treatment would cost about $17,000 up front and $3,500 a year; replacement wells would cost $210,000 to $350,000. The main uncertainty is attribution. Neighboring farms also apply manure and fertilizer, and the township's groundwater carries nitrate from all of these. A hydrogeologist's 2025 report for the township estimated that the spray fields contribute between 30 and 60 percent of nitrate in wells downgradient of them, with the rest from cropland.

What Compliance Already Covers

The Ellery plant operates under a state wastewater discharge permit for land treatment. The permit limits the nitrogen applied per acre each year and requires monitoring wells at the field edges. The plant has met its permit limits for the past five years. The permit does not require the plant to monitor private wells, compensate households or reduce loading below its limits when nearby wells exceed the drinking water standard. Compliance covers how much is applied, not where the residual goes.

Why the Market Has Not Fixed It

Pigou (1920) argued that when an activity imposes costs on others that its operator does not pay, private and social costs diverge, and a tax equal to the external cost could bring them back into line. No such tax exists here; the permit sets a quantity limit, not a price on residual harm. Coase (1960) argued that if rights are clearly assigned and transaction costs are low, bargaining between the parties will reach an efficient result whichever side the law favors. Neither condition holds well. Households' rights to uncontaminated groundwater are unclear under state law when the source is a permitted activity. Transaction costs are high: 40 households would have to organize, establish attribution against several sources and negotiate with a firm that has far more resources. The Coasean bargain has not happened, and the reasons are visible in the case.

The Residual Duty and Its Limit

Having complied with every rule, Sawyer Creek still exports a cost it causes. Its residual obligation, on this analysis, is to pay its share of that cost: funding drinking water treatment for every household above the standard within the affected area, and maintaining it, which is cheap relative to the plant's operations, while funding a share of well replacement proportionate to the hydrogeologist's lower attribution estimate, 30 percent, for households that choose it. The company should also test wells downgradient of its fields every two years and report the results. The limit of the duty is the company's share: it does not owe for nitrate from cropland it does not control, and it does not owe compensation for harms the evidence cannot yet support.

Cost of the Residual Duty

Treatment for 14 households costs about $17,000 up front and $3,500 a year. A 30 percent share of replacement wells, if all 14 households chose them, would add up to about $105,000. Biennial testing adds about $5,000 each time. Together the obligation comes to about $155,000 over five years at most, against a plant that processes vegetables worth many millions each season.

References

Coase, R. H. (1960). The problem of social cost. Journal of Law and Economics, 3, 1-44. https://doi.org/10.1086/466560

Pigou, A. C. (1920). The economics of welfare. Macmillan.

Ward, M. H., Jones, R. R., Brender, J. D., de Kok, T. M., Weyer, P. J., Nolan, B. T., Villanueva, C. M., & van Breda, S. G. (2018). Drinking water nitrate and human health: An updated review. International Journal of Environmental Research and Public Health, 15(7), Article 1557. https://doi.org/10.3390/ijerph15071557