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Prevention and Cleanup of Dynamic Harm Under Environmental Liability

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  • Tim Friehe

    ()

  • Eric Langlais

    () (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper explores incentives for accident prevention and cleanup when firms are subject to environmental liability. In our two-period setup, the level of environmental harm in the second period depends on first-period harm when cleanup was incomplete. Under strict liability, in the first period, firms with a positive probability of going out of business before the second period have inadequate prevention and cleanup incentives. The fundamental disconnect between private incentives and social optimality cannot be remedied by using a multiple of harm as the level of compensation. Under negligence with causation requirement, incentive problems remain; however, under negligence without such a requirement, first-best incentives may emerge, and using a multiple of harm as level of compensation can ensure the efficient solution.

Suggested Citation

  • Tim Friehe & Eric Langlais, 2017. "Prevention and Cleanup of Dynamic Harm Under Environmental Liability," Post-Print hal-01549786, HAL.
  • Handle: RePEc:hal:journl:hal-01549786
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01549786
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    Keywords

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    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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