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Environmental liability, imperfect information and multidimensional pollution control

  • Bartsch, Elga
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    A well known result in the economics of tort law is that in the case of a unilateral stochastic externality both a negligence rule and strict liability are in general able to achieve socially optimal precaution. It will be shown in this paper that this equivalence result does no longer hold if imperfect information and multidimensional pollution control activities are considered. It will turn out that a negligence rule may in fact have an adverse effect on the incentives of a potential polluter, causing an uncertain environmental damage, to take appropriate precaution. The change in incentives can be attributed to two effects: immunisation from potential liability and sharpening of incentives for observable precaution diverting effort from unobservable to observable precaution. A standard of negligence tends to distort the choice among different > strategies available in reduction of environmental risks, when pollution control efforts are imperfectly observable to differing degrees. This distortionary effect prevails to an even larger extent if there is no uncertainty with respect to the findings of negligence. Hence, in contrast to one-dimensional models of uncertain negligence, the model presented in this paper implies that when the set of possible strategies in reducing environmental risk is somewhat richer than just a onedimensional decision, uncertainty in verifying the negligent behaviour may actually improve incentives to take preventive pollution control measures compared to a certain standard of due care. Moreover, the polluter's response to changes in the policy parameters are no longer clear-cut in the way that is indicated by the standard model. Under some circumstances, an increase in the standard of negligence may lead to a decline in the level of precautionary pollution control. Therefore, the environmental policy maker has to be very careful when deciding on an optimal second best policy consisting of a divergence of the standard of negligence from the socially optimal level.

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    File URL: http://econstor.eu/bitstream/10419/46829/1/257454551.pdf
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    Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 690.

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    Date of creation: 1995
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    Handle: RePEc:kie:kieliw:690
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    1. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
    2. Peter A. Diamond, 1974. "Single Activity Accidents," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 107-164, January.
    3. 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.
    4. Polinsky, A Mitchell & Rubinfeld, Daniel L, 1988. "The Welfare Implications of Costly Litigation for the Level of Liability," The Journal of Legal Studies, University of Chicago Press, vol. 17(1), pages 151-64, January.
    5. Dasgupta, Partha & Hammond, Peter & Maskin, Eric, 1980. "On Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Wiley Blackwell, vol. 47(5), pages 857-60, October.
    6. Kwerel, Evan, 1977. "To Tell the Truth: Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 595-601, October.
    7. Zweifel, Peter & Tyran, Jean-Robert, 1994. "Environmental impairment liability as an instrument of environmental policy," Ecological Economics, Elsevier, vol. 11(1), pages 43-56, September.
    8. Spulber, Daniel F., 1988. "Optimal environmental regulation under asymmetric information," Journal of Public Economics, Elsevier, vol. 35(2), pages 163-181, March.
    9. Emons, Winand, 1994. "The provision of environmental protection measures under incomplete information: An introduction to the theory of mechanism design," International Review of Law and Economics, Elsevier, vol. 14(4), pages 479-491, December.
    10. Polinsky, A Mitchell, 1980. "Strict Liability vs. Negligence in a Market Setting," American Economic Review, American Economic Association, vol. 70(2), pages 363-67, May.
    11. Craswell, Richard & Calfee, John E, 1986. "Deterrence and Uncertain Legal Standards," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 279-303, Fall.
    12. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April.
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