On the Limitation of Penalties and the Non-Equivalence of Penalties and Taxes
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.
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- 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.
- 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. Full references (including those not matched with items on IDEAS)
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