Compensating for environmental damages

- What is the best compensation that restores the aggregate welfare at a minimal cost?
- A minimal ecological compensation based on HEA is implemented.
- Monetary and ecological compensation may coexist for a marginal damage.
- Ecological constraint increases the cost but reduces inequality between victims.
- For a large number of victims an ecological compensation is the best option.

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.