Prevention and cleanup of dynamic harm under environmental liability |
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Institution: | 1. Department of Economics and Finance, University of Guelph, Guelph, ON N1G 2W1, Canada;2. Department of Economics, University of Illinois, 216 David Kinley Hall, 1407 W. Gregory Dr., Urbana, IL 61801, USA;1. National Advanced School of Engineering, University of Yaounde I, P.O. Box 8390, Cameroon;2. Department of Physics, Faculty of Science, University of Yaounde I, P.O. Box 812, Cameroon;3. Department of Physics, Faculty of Science, University of Maroua, P.O. Box 814, Cameroon |
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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 a causation requirement, incentive problems remain; however, under negligence without such a requirement, first-best incentives may emerge, and using a multiple of harm as the level of compensation can ensure the efficient solution. |
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Keywords: | Environmental liability law Prevention Cleanup Care Environmental harm |
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