The choice of instruments for environmental policy: Liability or regulation?

Published date15 August 2002
Date15 August 2002
AuthorMarcel Boyer,Donatella Porrini
Marcel Boyer and Donatella Porrini
We address in this paper the problem of comparing and choosing among
different policy instruments to implement the incentive objective of an effi-
cient deterrence of environmental degradation and the remedy objective
of an efficient clean-up of damages and a proper compensation of victims.
Two main instruments are considered, namely the assignment of legal
liability for environmental damage, such as in the American CERCLA and
in the European White Paper, including extended liability provisions, and
the design of an incentive regulation framework. Our results derive from
a formal and structured analytical approach to modeling the economic
interactions between different decision makers such as governments, firms,
regulators and financiers.
Different policies have been considered to implement a proper internalization
of environmental externalities: taxes, quotas,
subsidies, marketable
permits, assignment of liabilities, etc. This addresses directly the problem of
comparing and choosing among different policy instruments to implement a
An Introduction to the Law and Economics of Environmental Policy: Issues in Institutional
Design, Volume 20, pages 245-267.
Copyright © 2002 by Elsevier Science Ltd.
AH rights of reproduction in any form reserved.
ISBN: 0-7623-0888-5
given set of environmental protection objectives. ~ Considering a law and
economics approach, the chosen instrument must address an incentive
objective (the efficient deterrence of environmental degradation) and a remedy
objective (the efficient clean-up of damages and the proper compensation of
We intend to compare in this paper two instruments, namely the assignment
of legal liability for environmental damage and the design of an incentive
regulation framework in the context of a political economy theory of environ-
mental policy. A system of liability assignment can provide compensation to
victims while internalizing the social costs of harm producing activities, 2 by
identifying the cause of environmental harms, assessing the behavior of the
actors responsible for such harms, and quantifying the harms for plaintiffs.
In a world of perfect or at least complete information, the law and economics
approach suggests that this first instrument is an efficient method to solve the
problem of internalizing the potential effects of environmental accidents.
ante, the
firm, its owners and operators, face the proper incentive to take the
efficient level of precaution and,
ex post, the
individuals harmed by pollution
receive a proper and complete compensation, possibly through an insurance
provider. But in practice, the allocation of individual responsibility seems to
have caused delay in the clean up of damaged sites and contributed little to the
objective of deterrence, 3 in particular when "judgement-proof' firms were
involved. 4
The following reasons have been suggested to explain this result. First, a
specific polluter could in many cases be difficult to identify. A disease or a
reduction in health could be attributed to a number of different factors besides
the pollution. Even if a link between a pollutant and the disease could be
established, it turned out to be difficult in many cases to determine which firm
was responsible for the damage. Second, compulsory insurance contracts that
the firms were induced or forced to buy turned out to be incomplete or
insufficient because it was, in many cases, difficult to determine the probability
of accident and the distribution of the loss caused by environmental accidents, 5
hence making the pricing of the contracts more difficult. Third, the polluter
ended up in some cases to be insolvent and unable to pay for clean-up or
compensation costs because of an increasing number of smaller finns operating
in dangerous activities and because of the increasing costs and penalties of
environmental accidents. Moreover, additional problems can arise in an
incomplete information context, as analyzed by the economic literature: the
asymmetric information about the firm's technology or accident preventing
efforts implies that a rent must be given up to the stakeholders of the firm and
the choice of a specific environmental policy affects this rent.

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT