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Optimal Cleanup and Liability After Environmentally Harmful Discharges

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  • A. Mitchell Polinsky
  • Steven Shavell

Abstract

This article studies how liability for environmentally harmful discharges affects the incentives of firms to engage in cleanup and invest in precautions, as well as the incentives of consumers to purchase the goods whose production leads to discharges. Our main conclusion is that making firms responsible for cleanup and strictly liable for any remaining harm will lead to the socially optimal outcome. We also show that under the negligence approach -- whereby a firm is liable for damages only if it fails to take appropriate precautions or to engage in proper cleanup -- the outcome will not be optimal: too much of the good will be purchased.

Suggested Citation

  • A. Mitchell Polinsky & Steven Shavell, 1992. "Optimal Cleanup and Liability After Environmentally Harmful Discharges," NBER Working Papers 4176, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4176
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    References listed on IDEAS

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    1. Polinsky, A Mitchell, 1980. "Strict Liability vs. Negligence in a Market Setting," American Economic Review, American Economic Association, vol. 70(2), pages 363-367, May.
    2. Segerson, Kathleen, 1990. "Liability for groundwater contamination from pesticides," Journal of Environmental Economics and Management, Elsevier, vol. 19(3), pages 227-243, November.
    3. Cohen, Mark A, 1987. "Optimal Enforcement Strategy to Prevent Oil Spills: An Application of a Principal-Agent Model with Moral Hazard," Journal of Law and Economics, University of Chicago Press, vol. 30(1), pages 23-51, April.
    4. Cohen, Mark A., 1986. "The costs and benefits of oil spill prevention and enforcement," Journal of Environmental Economics and Management, Elsevier, vol. 13(2), pages 167-188, June.
    5. Segerson, Kathleen, 1989. "Risk and incentives in the financing of hazardous waste cleanup," Journal of Environmental Economics and Management, Elsevier, vol. 16(1), pages 1-8, January.
    6. Burrows, Paul & Rowley, Charles & Owen, David, 1974. "The economics of accidental oil pollution by tankers in coastal waters," Journal of Public Economics, Elsevier, vol. 3(3), pages 251-268, August.
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    Cited by:

    1. Y. Farzin & Jonathan Kaplan, 2004. "Nonpoint Source Pollution Control under Incomplete and Costly Information," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 28(4), pages 489-506, August.
    2. Friehe, Tim & Langlais, Eric, 2017. "Prevention and cleanup of dynamic harm under environmental liability," Journal of Environmental Economics and Management, Elsevier, vol. 83(C), pages 107-120.
    3. Erik Lichtenberg & Tony M. Penn, 2003. "Prevention versus Treatment under Precautionary Regulation: A Case Study of Groundwater Contamination under Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(1), pages 44-58.
    4. James BARRETT & Kathleen SEGERSON, "undated". "Prevention And Treatment In Food Safety: An Analysis Of Conceptual Issues," Department of Resource Economics Regional Research Project 9521, University of Massachusetts.

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