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On the Limitation of Penalties and the Non-Equivalence of Penalties and Taxes

Author

Listed:
  • Stephan Marette
  • Estelle Gozlan
  • Bénédicte Coestier

Abstract

This paper compares the impacts of a penalty on accident and a per-unit tax on output, when social damages depend on the output of firms. The choice of the optimal regulation, aiming at internalizing a damage, is influenced both by the market power of firms and by their potential (in)solvency in case of accident. Output strategies influence the solvency situation of firms for paying a penalty, which may lead to multiple equilibria (all firms are either solvent or insolvent in case of accident). When social damages are large, the optimal penalty is capped for avoiding a situation with insolvent firms. In this case, a regulator implements a per-unit tax.

Suggested Citation

  • Stephan Marette & Estelle Gozlan & Bénédicte Coestier, 2004. "On the Limitation of Penalties and the Non-Equivalence of Penalties and Taxes," Working Papers 2004/02, INRA, Economie Publique.
  • Handle: RePEc:apu:wpaper:2004/02
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    File URL: https://www6.versailles-grignon.inra.fr/economie_publique/Media/fichiers/Working-Papers/Working-Papers-2004/WP_2004_02
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    References listed on IDEAS

    as
    1. Polinsky, A Mitchell, 1980. "Strict Liability vs. Negligence in a Market Setting," American Economic Review, American Economic Association, vol. 70(2), pages 363-367, May.
    2. Stephen F. Hamilton, 1998. "Taxation, Fines, and Producer Liability Rules: Efficiency and Market Structure Implications," Southern Economic Journal, Southern Economic Association, vol. 65(1), pages 140-150, July.
    3. Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
    4. A. Mitchell Polinsky & William P. Rogerson, 1983. "Products Liability, Consumer Misperceptions, and Market Power," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 581-589, Autumn.
    5. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
    6. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-177, March.
    7. Lewis, Tracy R. & Sappington, David E. M., 1999. "Using decoupling and deep pockets to mitigate judgment-proof problems1," International Review of Law and Economics, Elsevier, vol. 19(2), pages 275-293, June.
    8. Boyd, James & Ingberman, Daniel E, 1994. "Noncompensatory Damages and Potential Insolvency," The Journal of Legal Studies, University of Chicago Press, vol. 23(2), pages 895-910, June.
    9. Kolstad, Charles D & Ulen, Thomas S & Johnson, Gary V, 1990. "Ex Post Liability for Harm vs. Ex Ante Safety Regulation: Substitutes or Complements?," American Economic Review, American Economic Association, vol. 80(4), pages 888-901, September.
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    Cited by:

    1. Rouvière, Elodie, 2016. "Small is beautiful: firm size, prevention and food safety," Food Policy, Elsevier, vol. 63(C), pages 12-22.

    More about this item

    Keywords

    Social damage; Externality; Liability; Judgment-proof firms; Magnitude of penalty; Tax;

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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