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Corrective Taxation versus Liability


  • Steven Shavell


Taxation and liability are compared as means of controlling harmful externalities, with a view toward explaining why the use of liability predominates over taxation. Taxation suffers from a disadvantage in the analysis: because taxes do not reflect all the variables affecting expected harm, inefficiency results, whereas efficiency under liability requires only assessment of actual harm. However, liability also suffers from a disadvantage: incentives are diluted because injurers escape suit. Joint use of taxation and liability is examined, and it is shown that liability should be employed fully, with taxation taking up the slack due to escape from suit.

Suggested Citation

  • Steven Shavell, 2011. "Corrective Taxation versus Liability," American Economic Review, American Economic Association, vol. 101(3), pages 273-276, May.
  • Handle: RePEc:aea:aecrev:v:101:y:2011:i:3:p:273-76

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    References listed on IDEAS

    1. Henrik Lando, 2002. "When is the Preponderance of the Evidence Standard Optimal?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 27(4), pages 602-608, October.
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    1. repec:eee:jeeman:v:83:y:2017:i:c:p:107-120 is not listed on IDEAS
    2. Billette de Villemeur, Etienne & Leroux, Justin, 2013. "Curbing emissions through (efficient) carbon liabilities: A note from a climate skeptic's perspective," MPRA Paper 46953, University Library of Munich, Germany.
    3. Friehe, Tim & Langlais, Eric, 2017. "Prevention and cleanup of dynamic harm under environmental liability," Journal of Environmental Economics and Management, Elsevier, vol. 83(C), pages 107-120.
    4. Etienne Billette de Villemeur & Justin Leroux, 2014. "Curbing Emissions through a Carbon Liabilities Market: A note from a climate skeptic's perspective," CIRANO Working Papers 2014s-20, CIRANO.
    5. Indranil Chakraborty & R. Preston Mcafee, 2014. "Let the Punishment Fit the Crime: Enforcement with Error," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(2), pages 274-292, April.
    6. Etienne Billette de Villemeur & Justin Leroux, 2015. "Track-and-Trade: A liability approach to climate policy," CIRANO Working Papers 2015s-18, CIRANO.
    7. Steven Shavell, 2012. "A Fundamental Enforcement Cost Advantage of the Negligence Rule over Regulation," NBER Working Papers 18418, National Bureau of Economic Research, Inc.

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