Prevention and Cleanup of Dynamic Harm Under Environmental Liability

Tim Friehe and Eric Langlais

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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.

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Date: 2017
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Citations: View citations in EconPapers (5)

Published in Journal of Environmental Economics and Management, 2017, 83, pp.107 - 120

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Related works:
Journal Article: Prevention and cleanup of dynamic harm under environmental liability (2017)
Working Paper: Prevention and Cleanup of Dynamic Harm Under Environmental Liability (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01549786

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