On the Limitation of Penalties and the Non-Equivalence of Penalties and Taxes

Stéphan Marette (), Estelle Gozlan and Bénédicte Coestier

No 2004/02, Working Papers from INRA, Economie Publique

Abstract: This paper compares the impacts of a penalty on accident and a per-unit tax on output, when social damages depend on the output of firms. The choice of the optimal regulation, aiming at internalizing a damage, is influenced both by the market power of firms and by their potential (in)solvency in case of accident. Output strategies influence the solvency situation of firms for paying a penalty, which may lead to multiple equilibria (all firms are either solvent or insolvent in case of accident). When social damages are large, the optimal penalty is capped for avoiding a situation with insolvent firms. In this case, a regulator implements a per-unit tax.

Keywords: Social damage; Externality; Liability; Judgment-proof firms; Magnitude of penalty; Tax (search for similar items in EconPapers)
JEL-codes: K13 L13 (search for similar items in EconPapers)
Date: 2004-09-01
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Related works:
Journal Article: On the Limitation of Penalties and the Non-Equivalence of Penalties and Taxes (2005)
Working Paper: On the limitation of penalties and the non-equivalence of penalties and taxes (2005)
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