Accidents Happen: The Effect of Uncertainty on Environmental Policy Design
Major externality cases are random accidents which are not adequately addressed by the deterministic environmental policy literature -‐ that of Pigouvian taxes, abatement subsidies and cap-‐and-‐trade. We consider a risk-‐neutral industry where firms control the probability and Severity of accidents by preventive and responsive choices, but asymmetric information means Government only observes outcomes. We show that even without intervention, some care will be taken, however -‐ we identify three policies that lead to the optimal solution: strict liability, a Stochastic subsidy, and a mandatory mutual insurance scheme. The subsidy policy may be very costly to taxpayers, especially when prevention affects the probability of accident occurrence, and strict liability may be excessively draconian; polluters are also victims and liabilities must exist regardless of adherence to professional standards of care. Thus, we propose a revenue-‐neutral liability-‐pooling scheme which plays a similar role to tradable pollution permits in the deterministic case.
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- Swierzbinski Joseph E., 1994. "Guilty until Proven Innocent-Regulation with Costly and Limited Enforcement," Journal of Environmental Economics and Management, Elsevier, vol. 27(2), pages 127-146, September.
- Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
- Graff Zivin, Joshua & Small, Arthur A., 2003. "Risk sharing in Coasean contracts," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 394-415, March.
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