Government Regulation and Compensation: Implications for Environmental Quality and Natural Resource Use

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Traditional approaches to environmental regulation (such as the Clean Air Act and the Clean Water Act) rely heavily on the imposition of standards or technology requirements as mechanisms for meeting environmental quality goals. Such approaches can be viewed as allocating environmental property rights between polluters and victims in such a way that (i) polluters are allowed to impose some environmental costs on society without payment (since firms are not required to pay for residual damages) but (ii) society is allowed to restrict polluter behavior without having to compensate for losses (costs) that result from that restriction (Schmid, 1995).

Recently, this "intermediate" approach to the allocation of property rights has been challenged from both sides. For example, regulation of environmental and natural resources faces a challenge by private property rights advocates, who claim that government regulations that reduce the value of private property constitute "takings" that require compensation under the provisions of the Fifth Amendment of the U.S. Constitution (and most state constitutions) (Yandle, 1995). This issue arises in a number of contexts, including coastal development, wetlands, endangered species, water allocations, fishing rights, conservation requirements, and access to public grazing lands. Compensation for improvements in environmental quality has also been discussed in the context of international agreements to curb global pollution problems, although in such cases the proposed compensation often is nonmonetary.

Similarly, legislation such as the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), and the Oil Pollution Act (OPA), which impose far-reaching liability standards on polluters, challenge the notion that polluters do not have to pay for residual damages that result from lawful behavior (Tietenberg, 1992). They require polluters to pay compensation for damages even when firms were in compliance with existing regulations and sometimes even when the firm's actions were only marginally related to damages (as is possible under joint and several liability).

Despite Coase's Theorem, questions about the need for one party to pay compensation to the other can have implications for environmental quality and natural resource use. For example, payment of compensation for land use restrictions is thought to create a moral hazard problem for landowners (Miceli and Segerson, 1994), while failure to pay might encourage excessive government regulation and create perverse incentives for landowners to seek ways to circumvent the regulation - for example, to "shoot, shovel and shut-up" (Yandie, 1995). Similarly, the liability standards that are imposed on polluters affect their economic decisions. For example, imposition of joint and several liability has implications for the firm's incentive to engage in precautionary behavior. It can also affect land and financial markets, since potential buyers and lenders see future liability as a possible hidden cost (Segerson, 1993, 1994). Thus, the question of whether compensation is paid or not can have implications for environmental quality and natural resource use. Given these implications, one can then evaluate laws or legal principles that establish compensation rules to see if they are justified on economic efficiency grounds.

If compensation is to be paid, then the following questions arise: What are the appropriate amount and type of compensation? How can the loss that is suffered be measured, and what role should expectations play in defining that loss? Similarly, when pollution damages public resources, how should compensation for damages be defined, and what form should it take? Should monetary payments be used for restoration or other purposes? How are losses valued, and what is the appropriate baseline from which losses are to be measured?

This edition contains a set of papers that address both sides of the compensation debate, namely, compensation of private property owners for regulatory restrictions that reduce private property values and compensation for damages from spills and releases of hazardous substances and oil under CERCLA and OPA. …

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