The following hypothesis was tested: Willingness to bear a negative water impairment externality differs between those who do and those who do not receive economic benefit from the impairment source, e.g., a paper mill. The hypothesis was tested using a hedonic analysis of ambient water quality in two discrete housing markets in the Pigeon River Watershed, which have been polluted by the operation of a paper mill. The results suggest that North Carolina residents of the subwatersheds with impaired river, who experience economic benefits from the paper mill in addition to harmful effects, do perceive the pollution as a negative externality, whereas they may have a willingness to bear a similar type of negative externality associated with impaired streams. In contrast, the effects of both degraded river and streams on property values is perceived as a negative externality by residents in the Tennessee side, who experience only harmful effects from the pollution. North Carolina residents may hold greater willingness to bear the harmful effects of pollution as a given condition in their decision-making process because they receive economic benefits from the paper mill, while this internalization of the negative externality is weaker for residents in the Tennessee side.


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