People who have never been to Prince William Sound and never plan to visit nevertheless may feel a keen sense of loss over the damages it has sustained from ten million gallons of spilled oil. Many economists contend that this loss must be reflected in court damage awards. Moreover, they say, there are methods available for attempting to put a dollar value on it.
When the Exxon Valdez hit Bligh Reef in Prince William Sound, Alaska, on March 24, the massive spill of crude oil triggered several important efforts. The first, of course, has been the attempt to recover as much oil as possible, clean up oiled beaches and shoreline, rescue threatened sea mammals and birds, and restore as much as possible of the affected area to its pre-spill condition. At this writing, the effort is employing more than 4,000 workers and costs may run to the hundreds of millions of dollars. It appears that the Exxon Corporation will be financially liable for cleanup and restoration costs.
The second initiative set into motion is a set of scientific studies of the dispersion, breakdown, and persistence of the spilled oil in the environment and its impacts on the terrestrial and marine ecologies of the region. Shortly after the accident, Exxon agreed to contribute $15 million toward scientific studies of the spill's impact.
And third, economists have taken on the thorny task of quantifying and assigning monetary values to the damages to the natural resources of the impacted region. Under provisions of the Clean Water Act of 1972 and Alaska State law, both the federal and state governments can sue "potentially responsible parties" to recover the economic damages sustained by the publicly owned natural resources of the affected region.
From an economic perspective, natural resource damages resulting from an accident such as the Valdez spill stem from the reduction in the flow of services from the environment as a consequence of its contamination by spilled oil. These services include such things as the biological productivity of the resource which supports commercial and sports fishing, hunting, and the subsistence efforts of local residents, and the visual beauty and amenities that attract tourists. Estimation of the damages involves identifying which valued services are provided by the publicly owned portions of the affected resources, measuring how much these services have been reduced or impaired as a consequence of the spill, and determining how much these lost services were worth to the people who formerly benefited from them.
What are damages?
The economic concept of damage is based on the idea of compensation—finding out how much money it would take to make everyone who has been affected by the reduction in service flows as well off as they were before the incident occurred. Although much of the attention of resource economists has been devoted to the analysis of the values of services to those who make direct use of the environment (so-called use values), it has been recognized at least since John Krutilla pioneering article, "Conservation Reconsidered" (American Economic Review, 1967), that environmental services could be valued by people who do not make direct use of them (so-called non-use values).
In the case of the Prince William Sound area, several types of uses are likely to be impaired by the oil spill. One of the more obvious is the use of the marine ecosystem as a source of fish for the commercial fisheries of Alaska. Prince William Sound houses some of the most productive fisheries in the world and supplies both domestic and international markets. If scientific studies are able to establish a relationship between the spilled oil and the harvest rates of commercial species of fish, quantifying the dollar loss to these fisheries will be relatively easy. This is because market prices—which reflect the value society places on the fishery—can be observed. These prices can provide a basis for measuring this component of the damage caused by the spill. Consumers as well as fishermen and processors are likely to suffer these losses. Consumers' losses may come in the form of higher prices for fish products. Fishermen and processors may suffer because of reduced revenues and higher costs.
By contrast, accurately estimating the damages to some of the other types of uses will be much more difficult. Many of the services provided by the region's resources cannot be purchased in markets. For example, the scenic beauty of the Sound enjoyed by local residents and visitors will be diminished by the presence of the oil on the beaches and the absence of wildlife killed or driven away by the oil pollution. Resident and nonresident sports fishermen may find the region less attractive because of the reduced chance of catching fish or fear of catching contaminated fish. No one is asked to pay a price for the pleasure of enjoying the scenic beauty or the right to fish on the open waters. How then can we place a value on these losses?
Economists have developed techniques for estimating the values of such unpriced resource services. They include drawing inferences from behavior such as willingness to incur travel costs to experience natural environments first hand and asking people directly about the values they place on these environments through what has become known as contingent valuation surveys. Although the absolute accuracy of such estimates cannot be guaranteed, economists do possess a widely accepted framework for measuring these values. The framework applies not only to those services traded in markets but also to those types of individuals' values that are unpriced and therefore not revealed through market transactions.
Non-use values
A third category of damage ensues not from the diminution of the quality or quantity of services provided by the Sound, but rather from society's knowledge that a unique natural environment has been injured. Economists refer to these damages as lost non-use or intrinsic values. The parties suffering lost non-use values may be the same parties who have experienced lost use values but may also include the generally larger group of individuals that had no direct involvement in the area of the spill but nevertheless feel a loss. Generally, economists would argue that non-use values have been reduced if individuals enjoying none of the Sound's use values would have been willing to pay some dollar amount to ensure that a spill of this magnitude would not have taken place or that the probability and/or magnitude of such an occurrence in the future could be reduced.
How can we place a value on the pleasure of enjoying scenic beauty?
It would be misleading to suggest that all economists agree about the measurement of non-use values or even agree whether non-use values can be measured at all. However, they do tend to agree that there are features of natural environments like Prince William Sound (such as unusual concentrations of wildlife, including rare and endangered species; unique scenic beauty; and pristine wilderness) that are valued by people who have never been to the Sound or never plan to visit. The origin of these values may lie in a desire to preserve the natural environments for the enjoyment of future generations or from a simple expression of stewardship. Economists generally place diminished non-use values on an equal footing with diminished use values and argue that failure to account for lost non-use values will understate the damage suffered by society. The case of the Valdez spill is no exception.
A substantial body of accumulated research dating back to the middle 1960s has led to the development of methods and empirical techniques for quantifying non-use values. Termed contingent valuation, the methodology combines knowledge from several disciplines in a consistent conceptual framework to measure non-use values. Contingent valuation is based on surveys used to gather data to help determine society's willingness to pay for public goods. This information about people's willingness to pay can be used as an indication of the existence of non-use values and as a tool for non-use value quantification. The contingent valuation method has been applied in the field on several occasions. It can be used to place dollar values on such things as enhanced visibility due to decreased power plant emissions and the diminished non-use values associated with contaminated drinking water.
Measuring non-use values is an admittedly difficult task. By necessity, the measurement techniques involve not only economic theory but knowledge of psychology, statistical science, and the techniques of survey research. Moreover, the introduction of these measurement techniques into courts of law and natural resource damage cases can hinge on the courts' interpretation of the rules of evidence as applied to survey results.
In addition, the surveys themselves and the questions they contain may be poorly designed, executed, and analyzed and thus produce results that misleadingly purport to quantify non-use values. Yet a growing body of research shows that well-designed, executed, and analyzed contingent valuation studies lead to valuation estimates that accord nicely with the results from other techniques. Thus there is confidence that contingent valuation can be reliably applied to the estimation of lost non-use values.
Who should pay?
Since the Valdez spill, it has been widely held that Exxon has behaved irresponsibly and the public should not hay to pay for the mistakes of the corporation or its employees. Meanwhile, the price of crude oil and gasoline have increased in the wake of the spill, prompting outrage and the suspicion of gouging. This suspicion is difficult to substantiate, since other factors such as the loss of some North Sea oil production and lack of refinery capacity in the face of new regulation governing gasoline volatility appear to have contributed to the price rise.
To the extent that negligence or criminal behavior might have been a factor in the spill, the economic concept of deterrence and simple notions of justice suggest that those with individual or corporate responsibility should bear the costs associated with their actions. But the idea that consumers of petroleum products should bear at least some portion of the costs of environmental risk and damage associated with bringing fuel to the pumps has validity from an economic perspective. Those who use petroleum products do bear some responsibility for the environmental risks and damages that are an inevitable part of the oil exploration, production, and delivery system that serves their demands. An efficient allocation of resources requires that they accept the financial burden that goes along with that responsibility.
Economic role in assessment
If the economic damages from the Valdez oil spill can be accurately assessed and monetary damages can be collected from the responsible parties, we can expect several economically beneficial consequences in addition to the potential for compensating those who experienced the most serious losses. First, since the damages will become part of the cost of doing business, prices of petroleum products will rise, thus more accurately reflecting the environmental costs associated with their extraction and transportation. Higher prices, in turn, should mean less consumption of petroleum. At the same time, the potential liability for damages due to future spills is also likely to reduce the expected returns to the oil companies from exploration and development in more risky environments. And third, the prospect of liability for large natural resource damage claims should provide the oil industry with incentives to take further actions to increase the safety of their operations and to reduce the risks of future accidents.
On the other hand, if the economic damages are not accurately assessed, or if court-awarded damages are not based on sound economic analysis, we can expect undesirable consequences. An award that is excessive and exceeds the appropriate social compensation will lead to an economically inefficient underutilization of the nation's oil resources, while understating the damages would lead to excessive oil extraction and consumption. Whatever the economic damages are, it is important to do our best to get the numbers right.
A. Myrick Freeman III is a senior fellow in the Quality of the Environment Division at RFF and professor of economics at Bowdoin College. Raymond J. Kopp is director and senior fellow in RFF' s Quality of the Environment Division. This article is adapted from an op-ed piece by Freeman that appeared in the Wall Street Journal on May 24, 1989.
A version of this article appeared in print in the June 1989 issue of Resources magazine.
