WRRCTR No.155 Economics and Law of Compensation: Natural resources Policy

Most economists advocate full compensation for natural resource use and for personal injury. The intent of these positions is to assure proper resource allocation and equity. However, this advocacy often neglects nonmarket resources and perspectives of future generations. This neglect is compounded by the separation of legal process and economic analysis. As a consequence, many economists fail to understand how incomplete compensation is and lawyers frequently find economic analysis too naive and obscure to be useful. In this report economic and legal theories are described, contrasted, and integrated in a pragmatic conceptual framework. Causes of inadequate compensation are defined using a case-study methodology. Two types of case studies are presented. The first summarizes the published record of compensation for privately induced damage to natural environments; the second presents the results of an original survey on mitigation to environmental impacts of contested water projects. Compensation in both cases is inadequate, in terms of equity and eliminating externalities, because of biased institutional factors. To make compensation more adequate,changes in property rights, liability rules, and insurance are suggested in combination with enhanced public trust doctrine.Grant/Contract No. S-00