Valuing Natural Resource Damages: Economics for CERCLA Lawyers

Edward J. Yang

Editors' Summary: New paths in the development of pollution control law and resource economics intersect in the natural resource damage provisions of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The law gives the trustees for public access natural resources a new, streamlined cause of action for recovery of damages inflicted by the improper disposal of hazardous substances. At the same time, resource economists have been developing sophisticated methods for estimating the value of such resources to society. That value is not fully recognized by traditional measurement techniques that look to the marketplace for guidance, because these resources — parks, rivers, and wilderness areas — are not traded in the market. Dr. Yang, an economist who has been active in the subject of valuing pollution damages to natural resources, examines the alternatives for valuing those resources under CERCLA. He argues that, where practical, the measure of damage should be the loss in the value of the services that the damaged resources provide for their users. He points out situations in which it is now possible to make reasonable estimates of user value, and situations in which it is not, urging lawyers in the field not to always seek the simplest solution and economists not to always seek the most theoretically correct.

Dr. Yang is Director of the Environmental Law Institute's Resources Program and is the author of several articles and reports on the valuation of damages to natural resources. The author wishes to acknowledge the support of the General Electric Foundation, which helped make possible the writing of this Article.

[14 ELR 10311]

On December 11, 1983 many government agencies that are trustees of natural resources awoke to the realization that they had missed an opportunity to recover for certain hazardous substance damages¹ under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund).² This rude awakening has finally focused attention on what many observers consider the "sleeper" issue under CERCLA.³ CERCLA's natural resource damage provisions⁴ may be as important as its cleanup requirements⁵ in affecting the handling and disposal of oil and hazardous substances. The Act defines natural resources broadly⁶ and facilitates recovery with provisions such as a rebuttable presumption that damage assessments conducted in accord with federal standards are correct.⁷ Assessing natural resource damages requires meshing different disciplines, including environmental science, resource economics, and environmental law in a four-stage assessment process: (1) establishing the discharge source; (2) identifying the direct resource damage; (3) estimating indirect and expected future injuries; and (4) valuing the damages resulting. The focus of this Article is on the last step of damage assessment: valuing the damages in dollar terms.⁸

Economists and lawyers will immediately see that there are several judicially recognized methods for determining the damages.⁹ A closer examination shows that most of the damages recovered in court are based on lost market value,¹⁰ which in general is not applicable to resources [14 ELR 10312] held by public trustees. And the economic tools for valuing nonmarket goods are still in the research stage. The result is that judicial valuation of damaged natural resources has been confusing and, from an economist's perspective, often erroneous.¹¹

This Article considers two fundamental problems in assessing damage to natural resources owned by the public. The first is choosing the technique or techniques for valuing the resource damages. The best solution appears to be an approach that combines all available choices with the flexibility to use the one that best fits the circumstances of a specific natural resource damage incident. The second problem is how to take account of damages secondary to the direct harm to natural resources: risks to public health and harm to economic enterprises dependent on the public use of the resources. Public health risks should be accounted for, but not all valuation techniques can do so. On the other hand, under some circumstances it will not be necessary to give special attention to secondary economic effects for they are accounted for by the market.

Measuring The Value of Open-Access Natural Resources

Natural resources for which damages are recoverable under Superfund are by definition open-access.¹² The statute stipulates that the resources have to be held by public trustees. Usually these resources are open to the public for free or for a nominal charge, such as an entrance fee to a state park.The determination of damages would have to be based on the value of the direct flow of services from these resources to the public.¹³ However, unlike placing values on privately owned natural resources,¹⁴ valuing open-access resources is difficult because they are not traded in the marketplace and have no observable prices. There are two reasons why open-access resources are not normal goods. First, by definition they are common property resources. No one can claim ownership, exclude others from their use or charge for that use. Therefore, no one has an incentive to produce open-access resources and trade them as market goods. Second, such resources are generally public goods that, in the extreme case, are defined by economists as goods whose consumption "leads to no subtractions from any other individual's consumption of that good."¹⁵ This means that users cannot trade their shares of uses among each other. In fact, such resources are often indivisible. Consequently, their value, when identifiable, must be calculated by adding the individual values to all the users.

The nature of open-access goods causes controversy in defining their value. Should such goods be valued at all? Those opposed to measuring the worth of such goods in monetary terms claim that (1) there is no social concensus that monetary units can express the value of open-access natural resources, or (2) the functions of such resources are in general too complex to be reflected by any valuation method that can be applied practically in the foreseeable future.¹⁶

On the first point, while there is no empirical evidence on where the public stands, there are economic and legal theories supporting attempts to allocate uses (misuses) of open-access resources through the market, and, by definition, to determine values in monetary terms. Economists argue that valuing such resources is an important step to "internalizing" the cost of polluting activities. Recovering damages to these resources is a textbook example of such internalization;¹⁷ it would increase the overall welfare of the society¹⁸ and may create "general deterrence" that will reduce the amount of hazardous substance pollution.¹⁹

On the second point of opposition to valuing open-access resources, there clearly are limitations to the valuation methodologies. It is almost impossible to catalogue all the functions of a wetland and estimate their value. Available valuation methods are severely limited when applied to unique resources, such as endangered species, historic sites, and natural wonders. Difficulties arise from two major economic assumptions underlying the valuation process. The first is that open-access natural resources are valued only in terms of their contribution to human welfare as perceived by individuals now living. The lack of participation by future generations in determining values of irreversible damages introduces a bias to the measurement of unknown direction depending on the [14 ELR 10313] difference in the preference patterns of the generations. The second assumption is that individual preferences are characterized by substitutability. If an individual experiences a decrease in some environmental service, there is a monetary payment (which represents command over other goods and services) that will compensate the individual for the loss. To the extent that substitutability does not exist for some natural resources, valuation cannot take place.

The applicability of valuation methods depends on the reasonableness of assumptions applied to the resource to be valued. When the assumptions are clearly untenable, society resorts to ex ante control of uses through some form of collective decision, such as by legislative or regulatory bodies.²⁰ In spite of such regulatory schemes, pollution releases still occur and injure or destroy natural resources. The government may seek "damages" in such cases, but will calculate them to impose a penalty strong enough to deter future releases, rather than to recover the value of the service of the lost resource. Such damages no longer resolve the allocation issue.

In sum, proper valuation of damages to natural resources is an important step in minimizing total costs of hazardous substance pollution. Lawyers and government officials implementing CERCLA should heed economists in order that natural resource damage assessments closely approximate the resources' real value. Reliance on valuation techniques that are not appropriate for the subject category will misstate society's costs and waste its resources. Economists should recognize the limitations of their valuation methods and defer to other allocation schemes when the assumptions necessary for economic valuation are not operative.

Alternatives for Measuring Natural Resource Damages

In valuing damages to natural resources one confronts a confusing array of choices on how to proceed. Should damages be set at replacement cost, restoration cost, discharge unit cost, user value, replacement value, or equivalent compensation? CERCLA suggests that any or all of these choices could be considered. Do any of these alternatives measure the real social value of the damaged resource? These questions suggest two types of distinctions: where in the chain of events to look, and whether to look at cost or value.

Where to Measure?

Natural resource damages can be measured at three points in the chain of events producing the damage and its costs for society. The pollution discharge is the first. Setting a price on oil spills based on the type of oil and volume of the spill falls into this category. The second alternative focuses on the damage to the resource. It includes schemes that use the cost or value of restoration or replacement of damaged natural resources. The third choice looks to the reduction in the value of the resource to those who use it.

In theory the true value of the damage is the reduction in the willingness of the users to pay for the lost service from the damaged resource.²¹ The value of a resource is the service it provides to those who use it. Why not always value natural resource damages at the user level?

The primary reason not to is that it often is difficult to aggregate user losses from real world natural resource damages. If an oil spill kills waterfowl it will be much easier to count the birds than to count the number of birdwatchers and hunters affected by the loss. With the exception of resources under exclusive management, as in a national park where use frequency is often tallied, it is difficult to ascertain who are users and how many have been using the damaged resources. If there is no use record prior to the damage, it is necessary to seek out those who have used the resource in the past and no longer do as a result of the pollution. Once the users have found substitute sources of the service, it will be difficult to identify them. The most elusive users are the ones who may never have used the resource, but would be willing to pay for keeping open the option of future use. Resources that are unique and can not be replaced by manmade alternatives, resources such as the Alaska wilderness and the Rocky Mountains, attract such "hidden demand," which should be taken into account in measuring damages.

And what of future generations of potential users? Economists often avoid worrying about these users. They discount the resource value to present value, which tends to reduce to insignificance the importance of the next generation's concerns. Some of the assumptions underlying this technique can be questionable when valuing natural resource damages.²²

At the discharge level aggregation of losses is greatly simplified. Usually, if the source of a spill or release is identified, it is not difficult to discover the identify and quantity of the relased material. This ease of measurement is gained at the cost of making often arbitrary assumptions on how the discharge is ultimatelytranslated into the reduction of willingness to pay. Consider the difficulty of relating a gallon of oil spilled miles at sea to the loss to a sport fisherman on the beach. The damage value per unit of discharge will necessarily vary from site to site, not to mention from gallon to gallon. A unit discharge table assumes a simple linear damage function (the relationship between amount of discharge and extent of damage), which may be unrealistic in many cases.

Valuing the damage on the resource level may offer a better balance of practicality and accuracy. Recently the use of unit replacement value tables, such as fish-value tables, has been advocated for valuing damage incidents where a case-by-case assessment is too expensive.The [14 ELR 10314] value table scheme is most useful when the damaged resource provides consumptive services and can be counted (e.g., number of waterfowl or number of recreational fish killed by a spill). Valuation at this level is particularly effective if the initial valuation on which the table is based is conducted on the user level (e.g., have users place a contingent valuation on the resource). Once this value is established, future losses of the resource can be assigned the same unit value and aggregated. Another valuation method on this level is the cost of rehabilitation or restoration. This method is especially convenient for assessing damages to resources that provide nonconsumptive services. Rather than locating all the users and identifying their willingness to pay, valuation is carried out simply by calculating the expenditure necessary to reconstruct the damaged resource. The rehabilitation or restoration cost approach has practical advantages, but it also has weaknesses, which are outlined in the next section.

The choice of whether to measure damages at the discharge, resource, or user level depends on the nature of the speciic discharge incident. One must balance the cost and feasibility of each approach against its accuracy according to the conditions in each case.

Cost Versus Value

In economics there is a distinct difference between cost and value. Cost is the expenditure to produce a good; value is the measure of its worth. In market theory, the cost of producing different amounts of a good tells you nothing about how much of that good will be produced.To answer that question you also must know how much consumers will pay for different amounts of the good. When you have both pieces of information, the puzzle is solved. The amount produced will be that at which the cost and willingness to pay are equal. Supply equals demand at that price. At that point, cost, willingness to pay, price, and value all converge.²³ Empirically, a transaction between a seller and buyer is the only evidence of the price at which these amounts converge. If you know the market price of a unit of use of a resource, say a day of fishing in a trout stream, then you can use that cost figure as a measure of its value, because the two will be equal.

CERCLA does not appear to distinguish between cost and value in the calculation of natural resource damages,²⁴ implying that their costs and value converge, as do those of most market goods. But many natural resources, particularly those of the open-access variety, are not produced and sold in a market. Consequently there is no reason to believe that their cost equals their value to society. Cost may over-or understate value.

There is an overwhelming tendency to measure the losses of open-access natural resources in terms of their replacement or restoration costs.²⁵ Replacement costs are used in simplified assessment methods²⁶ such as value tables. Many states either use the unit price of similar resources sold in the market, such as hatchery prices for fish, or adopt the values compiled by the American Fishery Society, which are based on hatchery prices.²⁷ CERCLA seems to encourage replacement or restoration of damaged resources. It is not clear though, whether the statute endorses the cost of such action as a measure of natural resource damages when actual restoration is not intended. The statute provides for payment of replacement or restoration costs directly by liable persons or out of the fund:

Sums recovered shall be available for use to restore, rehabilitate, or acquire the equivalent of such natural resources.²⁸

The costs of Federal or State efforts in the restoration, rehabilitation, or replacement or acquiring the equivalent of any natural resources injured, …²⁹

However, the statute does not specifically require the damage assessment protocol to include replacement or restoration costs. The protocol is to consider "replacement value," together with use values, and other variables.³⁰

Understanding the implications of these alternatives requires a look at three key concepts: (1) willingness to pay, (2) replacement value, and (3) replacement cost.

Economists consider the willingness of consumers to pay for a good or service as the ultimate measurement of the value of the good.³¹ Although open-access resources are different from normal goods, economists believe that as long as the public is willing to pay for the services provided by these resources, the concept of willingness to pay exists and it should serve as a benchmark in valuing.

Replacement value is a market payment elsewhere for a resource similar to the one lost. The word "replacement" implies the item can take the place of the lost one. This approach does not work if the damaged resource is unique to the site of the damage.Value necessarily implies that the payment measures worth, since the good has been traded on the market. Hatchery prices are often used as replacement values because the fish were bought for the purpose of stocking or restocking streams. If the buyer was a state agency, it must have considered the public demand for the fish and judged it to be worth the hatchery prices. By the same reasoning, the cost of a newly constructed park can be used as the basis for the restoration value of a damaged park. The accuracy of using such surrogate values instead of the true willingness to pay for the lost resource depends on the similarity between the surrogate item and the damaged one in terms of their demand and supply.

Another difficult question is whether court awards can be considered as transactions. Some argue that in the [14 ELR 10315] long run court decisions setting damages reflect an efficient allocation scheme. However, in the case of assessments of damage to open-access resources, the courts have been uncertain. In Puerto Rico v. SS Zoe Coloctroni³² the court of appeals rejected the replacement value approach, stating:

To say that the law on this question is unsettled is vastly to understate the situation. The parties in this lawsuit, and we ourselves, have ventured far into uncharted water.³³

Given this uncertainty, court awards and settlements to natural resource damages may not constitute "optimal" allocation decisions from which one can extract values of damaged resources.

Another key aspect of replacement value is its independence from the actual replacement or restoration of the damaged resource. Its use reflects a decision to approximate the value of the damaged resource rather than to actually replace it. This seems to be what Puerto Rico had in mind when it calculated the replacement value of the destroyed organisms on its polluted beach by using the prices of marine organisms from biological supply laboratories.³⁴ The court of appeals, however, did not distinguish replacement value from replacement cost and thus injected technical feasibility into the valuation process as a precondition.³⁵

Replacement or restoration cost is the expenditure necessary to replace the lost resource with an identical one or to restore it to its original condition. Unlike replacement value, replacement cost is specific to the damaged resource. In using replacement cost as a measure of damages, two things are implied: the decision to replace or restore the damaged resource, and the availability of a plan to implement the replacement or restoration. The actual replacement is efficient compensation only if its cost happens to be equivalent to or less than the true value of the damage.

Under what circumstances is actual restoration or recovery of replacement value appropriate? Using willingness to pay as a benchmark, either method is acceptable when it is equivalent to the total willingness to pay for the lost or damaged portion of the resource. Otherwise, the surrogate will unnecessarily increase the total social cost of discharges. Replacement cost or value is less than willingness to pay when a resource has intangible values that a mere restoration cannot replace. Historical sites are good examples of this case. In such "imperfect restoration" cases, the polluter does not fully internalize the cost of its actions unless compensation in addition to the restoration cost is provided for. An exception is when the restoration is "perfect" and still the restoration cost is less than the willingness to pay value. Such a case is "abnormal," since there is demand for more of the resources than previously existed, demand that the market should have filled. The limiting factor may have been institutional constraints prohibiting the production of more of the demanded resource. Replacement cost or value can be higher than the willingness to pay because may of our natural resources are not "produced" by social decision reflecting their value. The cost of reconstructing these resources can be higher than their value. Providing complete restoration or replacement in such cases would be over-compensating the public.Restoration expenditure above this compensation level becomes a misallocated social resource.

Unfortunately, knowing whether or not to use replacement cost or value based on their relationship to willingness to pay is of little help. For many natural resources willingness to pay is not observable, and if it is, there is no need to resort to replacement value or cost. There are circumstances in which we can assume replacement cost or value to be close to willingness to pay without identifying the willingess to pay. Replacement value or cost can be an appropriate measure of damages if the resource or one similar to it was recently produced by a public resource allocation decision. For example, if a discharge of hazardous substances damages a recently constructed public park, restoration cost will be an appropriate compensation. The recent decision to use the land for public recreation rather than other possible uses (e.g., development) reflects the value the public places upon the park. If the park is so old that its original cost no longer reflects its current social value, one must look to similar, recently constructed parks for the replacement value. The key to the use of restoration/replacement value or cost is to look for social decisions, in either private or public sectors, which reflect the value of the damaged resource. The simplicity of replacement cost and value warrant consideration for their use under these circumstances. In other cases, it is advisable to use more sophisticated methods that can better gauge the true willingness to pay value.

Valuing Indirect Damages

Damages to natural resources inflicted by hazardous substances can trigger damages of several types. Indirect economic effects are one; for example, loss of tax revenue caused by lost business resulting from damage to a resource. A second category is the risk to public health from exposure to the pollution. Each type of damage requires its own approach in the damages assessment scheme.

Secondary Economic Harm

Inevitably, unemployment, lost business volume, and idle investments will result when an open-access resource is damaged. Whether to count these effects on the trustee's financial well-being when valuing damages has always been a controversial question for economists. In economics, secondary businesses are not considered part of the natural resource loss. Consequently, lost wages, lost sales, and lost payments on past investments are not recognized as economic losses. The reason is "opportunity cost."

Opportunity cost is a key concept in valuing economic losses of the types discussed here. It is, as Mishan puts it, "The worth of the current use of some good in some alternative use."³⁶ Economic theory postulates that, given the existence of opportunity cost, when existing employment disappears, inputs will move toward new [14 ELR 10316] employment opportunities. Then, from a national perspective, a redistribution of expenditure cannot be construed as a loss since logically the inputs will follow the emergence of demand elsewhere. For example, when beach A is polluted, the tourists may move to beach B in a neighboring state, redistributing their expenditures from businesses near beach A to those near beach B. If the now idle inputs at beach A move to beach B to absorb the rise in demand, there will be no social loss. Two caveats are needed.

First, the above theorem depends on the boundary of ownership. If a state loses tax revenue to its neighbors because of damage to its natural resources, the lost revenue constitutes a legitimate loss. If the entire nation holds the resource, the lost revenue will materialize in another state and is not a loss. This point is clearly illustrated in a study measuring damages from the Amoco Cadiz oil spill near the Brittany coast in France.³⁷ The study measured damages from three perspectives: global, national, and regional. Losses to Brittany included items such as reduced revenues to local government, reduced profits and earning and reduced outputs in related local industries. These items were not included from the national perspective.

Under CERCLA, the boundary for measuring the damages will be defined by who is the trustee for the damaged resources. The most troublesome overlap will be between federal agencies and the states. For many resources, distinguishing between federal and state trusteeship will be technically and institutionally difficult. The language of CERCLA's liability provisions³⁸ seems to indicate that either the President or the authorized representative of a state may assert the claims of both the United States government and any state.³⁹ Multiple trustees will most often opt for joint claims without distinguishing their resources. In fact, the National Contingency Plan encourages such cooperative effort.⁴⁰ But in calculating the damages, the assessment has to take either the federal or state perspective. The latter, of course, would lead to a larger assessment. Loss of efficiency will occur whenever the assessment boundary is not consistent with ownership regime. Either the state's ability to provide its services is reduced or the polluters pay too much. In summary, federal and state agencies mutually asserting each other's claims may be an expediency gained at society's expense.

The second modification is the need to recognize transaction costs during relocationof displaced labor and equipment. Transaction costs are essentially the costs of relocating inputs. They can be the costs of acquiring information, relocating people, obtaining new permits, training for new skills, adopting to a new surrounding, or even relinquishing a tradition. For example, commercial fishermen, because of family tradition, tend to be reluctant to relocate to other types of jobs, and fishing boats have few non-fishing uses. When inputs are difficult to transfer, the opportunity costs of the original enterprise are reduced. Moreover, opportunity costs are often lower than the existing payment because the input markets are not perfectly competitive. As a result, even if the input moves effortlessly to a new position, its payment will be less. In all the above cases, partial compensation to the inputs is appropriate so that the transaction costs do not accrue to the parties affected by the loss of the resource. The problem will be in empirically assessing the extent of the barriers to mobility.

Health Effect Value

Given that CERCLA defines natural resources to include air and ground- and surface water, the value of good health would seem to be integral to the value of such resources. One service clean air and water provide is protection against certain ailments. The use value of these resources should reflect the willingness to pay for good health. However, under CERCLA the users of these services cannot recover damages for potential health effects directly from the responsible party.⁴¹ The only health related damage recoverable by the public trustee is its lost capability to provide services of natural resources free from health effects.⁴² The situation is analogous to the trustee's lost capability to provide recreational opportunities to the public. Such lost capability, in turn, reduces the demand for the services of the resource. For example, contamination of an aquifer reduces the demand for its drinking water and the aquifer's value diminishes as an open-access natural resource. The damage to the resource is this change in its value. An accurate measurement of such damage will require calculation of the demand function for the service of the resource (drinking water or recreational opportunity) and a cross function showing the relationship between demand for drinking water and the level of its contamination. These functions are often difficult to estimate empirically.

Another way to measure health-related damages is to estimate users' willingness to pay to avoid the effects of contamination on health. This valuation method results from the simple assumption that the willingness to pay for using a contaminated resource is reduced by the expected personal cost of sustaining the health effects, which in turn is equivalent to the willingness to avoid the effects. However, the willingness to pay for avoiding health effects can be higher than the value of the resource in the use through which the harm is transmitted.⁴³ In such a case, the estimate will exaggerate the value of the lost resource.⁴⁴ If this is not the case, the willingness to avoid the health effects can be used to approximate the damages. Measuring this willingness to pay, however, is complicated by the discrepancy between the perception of the risk and the actual costs of a real incident of the health effect. Risk perception, as the voluminous literature devoted to this topic shows, depends on the subject's [14 ELR 10317] risk function and the type and frequency of the incident.⁴⁵ Even more difficult is the task of valuing life.⁴⁶ Ultimately, the willingness to avoid the health effect is the user's subjective expected cost of using the contaminated water, including intangible costs of pain and suffering. In the case of complete loss of groundwater, another way of measuring damages is the cost of an alternate water supply. However, this cost must be an upper bound on the value of the uncontaminated drinking water. If not, the user would have turned to an alternate water supply instead of using the groundwater.⁴⁷

The above discussion shows that the interface between health risk and damage assessment is intricate. It is not clear which measurement approach will prevail. Of course, the extent of the problem will depend on how often damages to natural resources include the health factor. For example, a cleanup operation could eliminate health risk. However, the reality of hazardous substance cleanup operations is that thechnical and financial constraints will seldom allow complete elimination of risk. The National Contingency Plan, which serves as the blueprint for remedial actions⁴⁸ merely states that the appropriate extent of the remedy shall be determined by the selection of the remedial alternative that will provide "adequate" protection of public health.⁴⁹ Under this standard, damaged natural resources often will continue to carry potential health threats. Where possible, measurement techniques that register such effects should be used to assess natural resource damages.

Conclusion

Valuing natural resource damages poses two major challenges. The first is choosing a valuation technique that will produce reasonably accurate results given the facts of the particular hazardous substance release. The second is knowing how to take account of secondary values, such as risks to human health and damage to economic activities dependent on the original use of the polluted natural resource. There are three basic choices for valuing natural resource damages: restoration cost, replacement value and user value. The last is the economically correct approach, but is not always feasible. The alternatives are reasonable surrogates under certain circumstances, but can seriously skew the damage measurement in other cases. The trick is in understanding when the surrogates are appropriate. Certain types of damage, such as threats to public health and secondary economic harm pose special problems. Health risks are private losses. Only in limited circumstances can they represent the lost value of the resource. This is also true of the replacement cost of alternative water supplies. On the other hand, it is unnecessary to try to factor secondary economic damages into the equation to the extent that demand for the damaged resources and the secondary economic activities are mobile within the trustee's boundary.

The bottom line is that there is no simple formula for accurately measuring damages to natural resources. CERCLA seems to recognize this by directing the President to consider a number of factors, including replacement cost and user value. Whether it will be possible to shape this general directive into regulations that will function effectively through the legal system, and reflect as much of the learning of economics as is practical remains to be seen. The effort will pay dividends to society in terms of better internalization of the costs of hazardous substance pollution, and a clearer focus on those natural resource values that can be valued in economic terms and those that cannot.

1. Washington Post, Dec. 20, 1983, § 1 at 1.

2. 42 U.S.C.§§ 9601-9657, ELR STAT. 41941. Although other statutes before CERCLA, such as § 311 of the Federal Water Pollution Control Act, provided for similar liability, CERCLA § 111 specifically allows the trustees to recover the damages from the Response Fund when the responsible party cannot be identified or refuses to respond within 60 days. See also Breen, Natural Resource Recovery by Federal Agencies: A Roadmap to Avoid Losing Causes of Action, 13 ELR 10324 (1983).

3. See Frost & Cross, Recovery of Natural Resource Damages Under Superfund, 3 ENVTL. ANALYST 8 (Dec. 1982); Dower, A Superfund Sleeper — Assessing Resource Damage, 2 ENVTL. FORUM 11 (1984).

4. CERCLA § 107(a)(4)(C) & (f), 42 U.S.C. § 9607(a)(4)(C) & (f), ELR STAT. 41947, 41948.

5. CERCLA §§ 104, 107(a)(4)(A), 42 U.S.C. §§ 9604, 9607(a)(4)(A), ELR STAT. 41945, 41947.

6. CERCLA § 101(16), 42 U.S.C. § 9601(16), ELR STAT. 41943, defines natural resources as: land, fish, wildlife, biota, air, water, groundwater, drinking water supplies, and other such resources belonging to, managed by, held in trust by, appertaining to, or otherwise controlled by the United States (including the resources of the fishery conservation zone established by the Fishery Conservation and Management Act, 16 U.S.C. §§ 1801-1882, ELR STAT. 41839), any state or local government, or any foreign government.

7. CERCLA § 111(h)(2), 42 U.S.C. § 9611(h)(2), ELR STAT. 41950. Any determination or assessment of damages in any judicial or adjudicatory administrative proceeding under this Act will have the force and effect of a rebuttable presumption. See Menefee, Recovery for Natural Resource Damages Under Superfund: The Role of the Rebuttable Presumption, 12 ELR 15057 (1982).

8. See, e.g., The Washington State Guideline for Evaluating Fresh-water Resource Damages (1980) for an illustration of the assessment steps.

9. See Halter & Thomas, Recovery of Damages by States for Fish and Wildlife Losses Caused by Pollution, 10 ECOLOGY L.Q. 5 (1982). For a more technical discussion, see FREEMAN, THE BENEFITS OF ENVIRONMENTAL IMPROVEMENT (1976). See also E. YANG, R. DOWER, & M. MENEFEE, THE USE OF ECONOMIC ANALYSIS IN VALUING NATURAL RESOURCES DAMAGES: AN OVERVIEW ch. IV (NOAA 1984).

10. There are several types of market value measures of damages to natural resources. They include: (1) diminution in property value (see, e.g., Ewell v. Petro Processors of Louisiana, Inc., 364 So. 2d 604 (La. Ct. App. 1965)); (2) depreciated rental value, (see Storley v. Armour & Co., 107 F.2d 499 (8th Cir. 1939)); (3) lost business opportunity, (see Carr v. United States, 136 F. Supp. 527 (D. Va. 1955)); Skansi v. Humble Oil & Refining Co., 176 So. 2d 236 (La. Ct. App. 1965)); and (4) replacement value, (see Puerto Rico v. SS Zoe Colocotroni, 456 F. Supp. 1327 (D.P.R. 1978)), rev'd, 628 F.2d 652, 10 ELR 20882 (1st Cir. 1980).

11. E.g., in Puerto Rico. v. SS Zoe Colocotroni, 628 F.2d 652, 10 ELR 20882 (1st Cir. 1980), the appeals court did not understand the use of replacement cost as an approximation of the value of the injury to the biota of the polluted shoreline. The court rejected the valuation method on the basis of thechnical feasibility rather than on the merit of replacement cost as a valuation method. Another example is the California damage assessment scheme that was used in State v. Vincilone, Civ. Doc. No. 15156 (Cal. Super. Ct. Riverside 1973). The scheme had potential for serious double-counting since the assessment sums up replacement cost, use values, and existence values. See E. YANG, R. DOWER, & M. MENEFEE, supra note 9, at 105.

12. For an explanation of the term "open-access" as used in economics, see KRUTILLA & FISHER, THE ECONOMICS OF NATURAL ENVIRONMENTS: STUDIES IN THE VALUATION OF COMMODITY AND AMENITY RESOURCES 20 (1975).

13. The most obvious services fall generally into the following categories: (1) consumptive recreation (sportfishing and hunting); (2) nonconsumptive recreation (bird-watching, boating, etc.); (3) preservation; (4) commercial fishing; (5) residential (groundwater, scenery, etc.); (6) commercial development; and (7) transportation.

14. Placing dollar values on privately owned natural resources is a reasonably straightforward process because the loss can often be estimated in tems of the existing market prices and changes in the flow of its service. For example, the value of a lake, enclosed by private land, may be inferred from the sales or rental value of the surrounding land. If the lake becomes polluted by a hazardous chemical spill and can no longer provide some of its services, such as swimming and fishing, the owner can sue to seek compensation for an amount equal to the difference between the pre-spill and post-spill sales price of the land.

15. Samuelson, The Pure Theory of Public Expenditure, 36 REV. ECON. & STATISTICS 387 (1954).

16. See Westman, How Much Are Nature's Services Worth, 197 SCIENCE 960 (1977).

17. The internalization can, of course, also take place through a tax on the pollution activities before the damage occurs. In economic terms both the tax (ex ante cost) and the damages (ex post cost) will be based on the same value. In practice, the legal system will not always produce this value equivalence, for example if damages include punitive elements.

18. See Coase, The Problem of Social Cost, 3 J. LAW & ECON. 1 (1960).

19. See G. CALABRESI, THE COSTS OF ACCIDENTS: A LEGAL AND ECONOMIC ANALYSIS 212 (4th ed. 1975). Calabresi argues that cost internalization creates "general deterrence," which he defines as "attempting to decide what accident costs of activities are and letting the market determine the degree to which, and the ways in which, activities are desired given such costs."

20. See G. CALABRESI, supra note 19. Calabresi admits that when the costs cannot be calculated, society should resort to "specific deterrence" to revise market decisions through law. Id. at 88-94.

21. The relation between discharge and damaged resource is called the damage function; while the one between damaged resource and user's willingness to pay is the demand function.

22. Discounting the future value of natural resource losses can be controversial because of uncertainty in forecasting the dynamics of the resource's ability to recover and the future market for the damaged resource. Future value depends on future supply of and demand for the resource. An aquifer whose value would be discounted away over a 50-year period under current market conditions might maintain significant value over a much longer period if demand is projected to increase (or supply of alternative sources of water to decrease) in the future. It is therefore important to delineate the assumptions concerning future supply and demand in assessing the future value of natural resource damages.

23. This simple illustration assumes an indivisible good, such as a public project.

24. See infra text accompanying note 30.

25. "Replacement," "restoration," and "rehabilitation" are used interchangeably in this paper. Although there is some difference among them (e.g., "replacement" seems to apply to discrete units of biota; "restoration" to system of resources), they essentially are based on reconstructing the lost or injured resource.

26. Simplified methods are generally based on tables or formula in calculating damages. CERCLA § 301(c)(2), 42 U.S.C. § 9651(c)(2), ELR STAT. 41954, specifically defines them to be standard procedures requiring minimum field observation and possibly to be based on units of discharged substance.

27. American Fishery Society, Monetary Values of Freshwater Fish and Fish-kill Counting Guidelines.

28. CERCLA § 107(f), 42 U.S.C. § 9607(f), ELR STAT. 41948.

29. CERCLA § 111(c)(2), 42 U.S.C. § 9611(c)(2), ELR STAT. 41950.

30. CERCLA § 301(c)(2), 42 U.S.C. § 9651(c)(2), ELR STAT. 41954.

31. Supra note 9. In an ideal case, willingness to pay can be surveyed directly from the users. The contingent valuation method attempts to do exactly this.

32. 628 F.2d 652, 10 ELR 20882 (1st Cir. 1980).

33. 628 F.2d at 678, 10 ELR 20895.

34. 456 F. Supp. at 1345.

35. 628 F.2d at 676-77, 10 ELR at 20894.

36. MISHAN, COST-BENEFIT ANALYSIS (1976).

37. NATIONAL OCEANIC AND ATMOSPHERIC ADMINISTRATION, ASSESSING THE SOCIAL COSTS OF OIL SPILLS: THE AMOCO CADIZ STUDY 2-7 (1983).

38. CERCLA § 107(f), 42 U.S.C. § 9607(f), ELR STAT. 41948.

39. Bleicher, The Impact of Superfund on Government Claims for Damages to Natural Resources, [Nat'l Ass'n of Att'ys Gen.] ENVTL. PROTECTION REP. 1, 3 (Aug. 1981).

40. National Oil and Hazardous Substances Contingency Plan, 40 C.F.R. § 300.74(b).

41. CERCLA § 107(f), 42 U.S.C. § 9607(f), ELR STAT. 41948.

42. The cost of health damage, of course, is a legitimate private loss.

43. Resource value here is not property value. It is the part of the property value that is attributable to the availability of the groundwater for drinking water.

44. In this case, the resident would be willing to sell the property at a loss that theoretically equals the willingness to avoid the health effect. However, the resident may hold out in the expectation of being compensated.

45. See, e.g., Starr & Wipple, Risks of Risk Decisions 208 SCIENCE 1114 (1980).

46. See Dower & Maldoando, An Overview: Assessing the Benefits of Environmental, Health and Safety Regulations (1981).

47. This assumes that the groundwater and the alternate water supply are perfect substitutes.

48. Remedial actions, in contrast to removal actions, are permanent remedies. CERCLA § 101(24), 42 U.S.C. § 9601(24), ELR STAT. 41943.

49. 40 C.F.R. § 300.68(h), (i), & (j).