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Corrective Taxation versus Liability

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  • Steven Shavell

Abstract

Taxation and liability are compared here as means of controlling harmful externalities. It is emphasized that liability has an advantage over taxation: inefficiency of incentives arises under taxation when, as would be typical, it would be impractical for a tax to reflect all variables that significantly affect expected harm, whereas efficiency of incentives under liability does not require the state to determine expected harm – it requires only that injurers pay for harm that occurs. However, taxation enjoys an advantage over liability: incentives under liability are diluted to the degree that injurers might escape suit. The optimal joint use of taxation and liability is also examined, and it is shown in the model that is analyzed that liability should be employed fully because liability creates more efficient incentives than taxation; a tax should be used only to take up the slack due to the possibility that suit for harm would not be brought.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16234.

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Date of creation: Jul 2010
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Handle: RePEc:nbr:nberwo:16234

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  1. Stavins, Robert N., 2003. "Experience with market-based environmental policy instruments," Handbook of Environmental Economics, Elsevier, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 9, pages 355-435 Elsevier.
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