Nonmarket Valuation and the Courts: The Case of the Exxon Valdez

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I. INTRODUCTION

On March 24, 1989, the tanker vessel Exxon Valdez went aground on Bligh Reef in Prince William Sound, Alaska, and subsequently spilled 11 million gallons of oil into the marine environment. The Exxon oil spill litigation may well be the major environmental case of this century. The September 1994 jury award of $5 billion in punitive damages is the largest ever in a pollution case and the second largest in a civil case in the United States. In phase two of the trial, the jury also awarded substantial compensatory damages of $286.8 million to commercial fishermen. The other major plaintiff, the Alaska native class, settled for $20 million just prior to going to trial. This paper focuses on compensatory damages from the perspective of four different realities: (i) economic theory ("in principle" the appropriate measure of damages), (ii) legislation and related regulatory guidelines (such as Comprehensive Environmental Response, Compensation, and Liability Act [CERCLA] and Oil Pollution Act [OPA] and the U.S. Department of the Interior [DOI] natural resource damage regulations codified at 43 CFR part 11), (iii) the court's interpretation of the law (what the presiding judge rules to be legally admissible), and (iv) the jury verdict.

Identifying reliable methods for measuring the value of nonmarket resources is an important current policy problem. The DOI and the National Oceanic and Atmospheric Administration (NOAA) are in the process of establishing regulatory guidelines for implementation of the Clean Water Act and CERCLA (59 Fed. Reg. 14262) and the OPA of 1990 (59 Fed. Reg. 1062). The set of plausible alternative procedures is finite and includes: (i) market prices, (ii) travel cost methods, (iii) hedonic methods, (iv) factor income, and (v) contingent valuation (e.g., 59 Fed. Reg. at 1182). (Sections IV.A and V.B below define the specific methods applied in the case at hand.) Contingent valuation has received considerable attention because it is the only method potentially capable of measuring so-called passive use values. In the Exxon Valdez public trustees case, plaintiffs used contingent valuation to value injury to Prince William Sound (Carson et al., 1992). The defendant's strategy involved funding studies that critically examined the contingent valuation methodology rather than directly estimating potential passive use losses (Hausman, 1993). As a result of the debate initiated by these two sets of studies, a select panel including several Nobel laureates in economics reviewed contingent valuation (Arrow et al., 1993). The use of contingent valuation to estimate passive use losses remains controversial (Hanemann, 1994; Diamond and Hausman, 1994).

While recent attention has focused on contingent valuation, a long-standing and extensive economics literature examines all of these valuation methodologies (recent overviews include Desvousges and Skahen, 1987; Ward and Duffield, 1992; and Kopp and Smith, 1993). But how acceptable are these methods in the courts? Judges and juries provide a very different litmus than the test of peer review by fellow economists. In a review of several cases, Cummings (1991) concludes that frequently the courts uncritically accept and inappropriately apply economic paradigms. Certainly the court environment is more demanding in terms of whether a given method seems reasonable and is readily communicated. The Exxon Valdez trial is of particular interest from this standpoint. One of the major plaintiff groups, the Alaska native class, submitted a claim for lost subsistence use. While subsistence is one of the basic types of services associated with natural resources that is specifically listed in the NOAA Proposed Rules (59 Fed. Reg. at 1140), little work exists on the development of valuation approaches for this type of resource service (for a review of this literature, see Brown and Burch, 1992). Both plaintiffs and defendants in this case implemented a hedonic approach for valuing lost subsistence use. …