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Law versus Regulation: A Political Economy Model of Instrument Choice in Environmental Policy

  • Marcel Boyer
  • Donatella Porrini

We analyze the conditions under which a legal intervention can be compared to a regulatory framework in the context of a political economy model of environmental policy. The first part of the paper describes the characteristics of the different instruments we want to compare: first, an assignment of legal liability, focusing on the case of extended lender liability, and second, an incentive regulation framework. We briefly describe the application of those instruments in the United States and Europe. In the second part a formal economy model is presented where the possibility of capture of the regulatory agency is modeled in a reduced-form fashion through an overvaluation of the social value of the informational rent of the firms. We show that compared with an extended, strict, joint and several liability system, a regulatory system may perform better or worse from a welfare point of view. Three factors underlying this comparison are discussed in some depth, namely the differential cost between low and high levels of environmental protection activities, the social cost of public funds and the overvaluation factor. Nous analysons les conditions sous lesquelles les approches légale et réglementaire peuvent être comparées dans le cadre d'un modèle d'économie politique de l'implémentation de la politique environnementale. La première partie de l'article décrit les caractéristiques essentielles des divers instruments à comparer, à savoir un régime de responsabilité légale élargie aux prêteurs et un régime de réglementation incitative, instruments typiquement utilisés aux États-Unis et en Europe. Dans la deuxième partie, un modèle formel d'économie politique est développé. La possibilité d'une capture de l'agence de réglementation est introduite sous forme réduite par la surévaluation de la valeur sociale de la rente informationnelle des entreprises. Nous montrons qu'un régime de réglementation incitative peut être plus ou moins performant en termes de bien-être qu'un régime de responsabilité élargie, stricte et solidaire. Nous analysons en profondeur trois facteurs principaux de cette comparaison, à savoir le différentiel de coût entre les niveaux faible et élevé de la protection environnementale, le coût social des fonds publics et le facteur de surévaluation.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2000s-57.

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Length: 41 pages
Date of creation: 01 Nov 2000
Date of revision:
Handle: RePEc:cir:cirwor:2000s-57
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  1. Boyer, M. & Laffont, J.J., 1995. "Environmental Risks and Bank Liability," Cahiers de recherche 9501, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. Laffont, Jean-Jacques, 1995. "Regulation, moral hazard and insurance of environmental risks," Journal of Public Economics, Elsevier, vol. 58(3), pages 319-336, November.
  3. Dionne, G. & Spaeter, S., 1998. "Environmental Risk and Extended Liability: the Case of Green Technologies," Ecole des Hautes Etudes Commerciales de Montreal- 98-12, Ecole des Hautes Etudes Commerciales de Montreal-Chaire de gestion des risques..
  4. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
  5. GOBERT, Karine & POITEVIN, Michel, 1998. "Environmental Risks : Should Banks Be Liable?," Cahiers de recherche 1198, Universite de Montreal, Departement de sciences economiques.
  6. BOYER, Marcel, 1995. "Environmental Protection Producer Insolvency and Lender Liability," Cahiers de recherche 9557, Universite de Montreal, Departement de sciences economiques.
  7. Karine Gobert, 1999. "Responsabilité des créanciers en matière environnementale," CIRANO Project Reports 1999rp-12, CIRANO.
  8. Pitchford, Rohan, 1995. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk," American Economic Review, American Economic Association, vol. 85(5), pages 1171-86, December.
  9. Marcel Boyer & Tracy Lewis & Wei Lin Liu, 1996. "Setting Standards for Credible Compliance and Law Enforcement," CIRANO Working Papers 96s-27, CIRANO.
  10. Hahn, Robert W, 1990. " The Political Economy of Environmental Regulation: Towards a Unifying Framework," Public Choice, Springer, vol. 65(1), pages 21-47, April.
  11. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-77, March.
  12. Heyes, Anthony G, 1996. "Lender Penalty for Environmental Damage and the Equilibrium Cost of Capital," Economica, London School of Economics and Political Science, vol. 63(250), pages 311-23, May.
  13. Boyd, James & Ingberman, Daniel E, 1997. "The Search for Deep Pockets: Is "Extended Liability" Expensive Liability?," Journal of Law, Economics and Organization, Oxford University Press, vol. 13(1), pages 232-58, April.
  14. Peter S. Menell, 1991. "The Limitations of Legal Institutions for Addressing Environmental Risks," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 93-113, Summer.
  15. Kornhauser, Lewis A & Revesz, Richard L, 1994. "Multidefendant Settlements under Joint and Several Liability: The Problem of Insolvency," The Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 517-42, January.
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