WHOSE LOSSES COUNT? EXAMINING SOME CLAIMS ABOUT AGGREGATION RULES FOR NATURAL RESOURCES DAMAGES

I. INTRODUCTION For natural resource damage assessment, economists think most readily in terms of Kaldor-Hicks compensation. First, the payment just sufficient to compensate the unit, typically the household, for the natural resource damage is determined, and then damages are aggregated across units to determine the total value of damage. While early intuition suggested that conflict about the assessment of damage would be centered on the first of these steps - that is, determination of compensation required by the household - considerable controversy has arisen about the second step. Clearly, total damages can be reduced if categories of benefits can be discovered to offset, in part, the damages and if grounds can be discovered to exclude from consideration the losses of whole classes of households who claim to have been damaged by natural resources injury. This paper is concerned entirely with the second step. The objective is to examine critically some current claims concerning offsetting benefits and justifications for excluding damages claimed on behalf of certain categories of the public. The analysis is concerned with what makes sense, from the perspective of welfare economics, in evaluating natural resources damage. Some arguments made here may be at variance with legal claims made on behalf of public trustees and/or responsible parties. For example, the U.S. Department of Justice has argued that claims concerning "offsetting benefits" have no standing under applicable laws. In particular, four claims will be exposed to scrutiny: (i) rubberneckers - i.e., those who come to observe natural resource injury or clean-up operations - enjoy benefits that offset at least a part of the welfare losses from environmental disasters (Dunford et al., 1997); (ii) and losses should not count when claimed on behalf of those who were unaware of the particular natural resources and/or the injury that had befallen those resources (Dunford et al., 1997): (iii) households whose behavior, or survey responses, revealed motivations inconsistent with the standard economists' account of utility theory (Opaluch and Grigalunas, 1992); and (iv) altruists (Milgrom, 1993), or a particular class of altruists (McConnell, 1997). To maintain the focus directly upon these four claims, the following discussion assumes that accurate and precise estimates of household-level damages are available. In particular, the discussion sets aside the issues of measurement - whether methods exist for accurate estimation of household-level damages, and whether some kinds of damages, or damages to some kinds of households, can in practice be estimated more readily than others - as well as the much-discussed problem of estimating household-level damage claims as opposed, for example, to willingness to pay (WTP) to prevent injury. It proceeds as though valid estimates of damages claimed are available for all relevant households in order to focus directly on questions of offsetting benefits and exclusion of particular categories of claimed damages. The bulk of the following argument proceeds in the context of the case most congenial to standard economic intuition: the responsible party is required to fully compensate the public for the injury to natural resources and may choose to provide the necessary compensation in whatever combination of resource restoration and money payments minimizes its cost. However, the legislation permitting public trustees to recover natural resource damages requires that compensation obtained be used to restore or replace the injured natural resources or to acquire equivalent resources. The 1996 guidelines for natural resource damage assessment under the Oil Pollution Act (61 Fed. Reg. 440) emphasize estimating the compensating scale of restoration. So, the analysis considers cases in which all compensation is required to be provided in the form of resource compensation (i.e., restoration, replacement, and/or acquisition of equivalent resources). …