MONEY, WHO NEEDS IT? NATURAL RESOURCE DAMAGE ASSESSMENT

I. INTRODUCTION Several authors (Mazzotta et al., 1994; Unsworth and Bishop, 1994; Jones and Pease, 1997; Unsworth et al., 1999) have discussed or suggested a shift of emphasis in natural resource damage assessment away from the monetary assessment of damages to direct analysis of compensatory restoration. Rather than first assess the monetary damages of the natural resource injuries and then use the money for restoration, trustees instead focus on the scale of restoration projects that would make the public whole. There are two primary justifications given in support of this new paradigm. First, federal natural resource damage assessment statues explicitly require that recoveries be used for the purpose of enhancing or creating natural resources (Jones and Pease, 1997; Mazzotta et al., 1994). (1) Estimating preferences for both injured and replacement resources may result in a more efficient use of recoveries. Second, directly assessing compensatory restoration may avoid some of the controversy that has been associated with the monetary assessment of damages (Jones and Pease, 1997; Randall, 1997). Much of the controversy over monetary damage assessment stems from the measurement of passive use values where small individual household damages can easily aggregate into the billions of dollars. For example, passive use value damages from the Exxon Valdez oil spill damage assessment were estimated at $2.8 billion (Carson et al., 1992). Direct measurement of compensatory restoration may provide responsible parties relief fro m the problem of aggregating monetary compensation over millions of households because public goods are used to replace public goods. In accordance with this new shift of emphasis in natural resource damage assessment, recent damage assessments plans in Texas (Texas General Land Office et al., 1999) and Wisconsin (Wisconsin Department of Natural Resource Services, 1999) were developed with an emphasis on compensatory restoration. It is safe to say that the paradigm shift has already happened. This article considers the question of whether or not money can be altogether avoided in damage assessment. The article provides an analysis of the restoration methods that have recently been advanced. The use of pure compensatory restoration will result in some losers and some gainers relative to preinjury utility levels due simply to the public goods nature of the compensatory goods. As the case with monetary compensation, a rigorous standard is necessary to meaningfully evaluate alternative scales of compensatory restoration. Providing the mean or median level of individual compensatory restoration may have appeal on account of the ease of implementation. Unfortunately, these measures have no grounding in welfare economics when using purely compensatory restoration. This article adopts a specific standard to judge the adequacy of the proposed methods: whether the resulting restoration projects at least satisfy the condition that the sum of individual compensating variations equal zero, a standard consisten t with welfare economics. The analysis leads to the conclusion that from the standpoint of adhering to the principles of welfare economics, money is a necessary condition for sound damage assessment practice. There are other practical reasons to model money along with natural resources under the new damage assessment paradigm. II. GUIDING ECONOMIC PRINCIPLES Compensating variation is the key concept in most applied welfare economic analysis; it provides both the economic and legal standard for damage assessment. In the case of natural resource damage assessment, the goal is to determine monetary compensation or restoration projects that could in principle make the public whole. For those individuals who suffer a loss from the natural resource injury, willingness to accept (compensating variation) by definition exactly satisfies the requirement that an individual can be returned to their preinjury level of utility. …