Ecological compensation: How much and where?

We develop a normative approach to optimal environmental compensation in a spatial framework. We determine both the location and the level of compensation that minimize the total cost of restoration while maintaining the social welfare unchanged. In our framework, the policy maker implements a No Net Loss policy that meets the No Worse-Off principle as well as a location constraint on the offset. We describe the additional ecological cost induced by the No Worse-Off principle and how the spatial distribution of individuals, the environment and land costs affect the compensation location. The location constraint is shown to give rise to a trade-off between the compensation cost and the inequality among individuals induced by the policy.