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Activity-Level Externalities

Listed author(s):
  • enrico, baffi

In the literature we find unanimous consensus on the analysis of bilateral accident models. In bilateral accident models, indeed, it is usually held that both with the negligence rule and with strict liability with contributory negligence, the residual bearer adopts an efficient level of precaution and efficient activity levels; the party that is not the residual bearer, on the other hand, chooses an excessive activity level since once the due precautions have been taken, they do not answer for the damage, regardless of the activity level adopted. One of the possible solutions put forward in the doctrine to achieve a first-best situation in the bilateral accident model is that of decoupling liability, in which both the parties are residual bearers: therefore, this is the idea of a Pigovian tax, under which the injurer pays the State a tax equal to the expected damage and the victim is not compensated for the damage suffered. In this way both the parties have an interest in acting diligently in order to reduce the costs which they incur and in choosing an efficient activity level. In our view, the common doctrinal assumptions are based on an erroneous belief. By building on an idea of Coase’s that is not held in sufficient regard by the doctrine, we intend to show that the residual bearer also maintains an excessive activity level in bilateral accidents, since he does not consider the precaution costs of the counterparty. He therefore tends to act even when his benefits are greater than the total expected damage and the cost of his precautions, but lower than the total social costs, in the sense of the sum of the expected damage, the cost of his precautions and the cost of the counterparty’s precautions

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42189.

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Date of creation: 2012
Handle: RePEc:pra:mprapa:42189
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  1. A. Mitchell Polinsky & Yeon-Koo Che, 1991. "Decoupling Liability: Optimal Incentives for Care and Litigation," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 562-570, Winter.
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