Compensating for environmental damages

This paper examines a situation in which a decision-maker determines the appropriate compensation that should be awarded for a given amount of ecological damage. The compensation can take the form of either or both monetary and environmental units to meet three goals: i) minimisation of the cost associated with the compensation, ii) no aggregate welfare loss, and iii) minimal environmental compensation requirement. The findings suggest that – in some cases – providing both monetary and environmental compensation can be the cost-minimising option. Minimal compensation constraints can increase total compensation costs but reduce individual gains and losses relative to the initial situation that arise from heterogeneous tradeoffs between income and environmental quality.