Abstract
This paper analyzes private incentives for precautions against environmental harm before accidents occur and for clean-up after the fact. We consider the compensatory regimes used in various jurisdictions, which differ in terms of the basis for compensation (the level of harm, clean-up costs, or some combination of the two) and the resulting levels of compensation. We establish that socially optimal decisions are usually not induced by liability law in any of the compensatory regimes. However, the different types and levels of compensation have distinct effects, allowing the policy maker to identify the most appropriate regime for specific circumstances.
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Notes
Among the tools used to perform ecosystem service valuation are revealed preference methods using observations of economic behavior, stated preference methods using information generated by surveys (e.g. applying the contingent valuation method) as well as cost-based evaluation using information about avoided damages as well as replacement cost. See Kennedy and Cheong (2013) and National Research Council (2011) for a discussion of conceptional issues and applications to the off-shore Deepwater Horizon oil spill catastrophe. The types of ecosystem services losses due to the catastrophe considered in the aforementioned studies are supporting services (like soil-and-sediment balance and nutrient balance), regulating services (like water quality and climate balance), provisioning services (like food and medical resources) as well as cultural services (like recreational opportunities as well as science and education).
This is not to say that other repercussions have been neglected in the literature. For example, Endres and Friehe (2011) establish that deviations between the level of harm and the level of compensation distort tortfeasors’ incentives to invest in technical progress.
See the seminal paper by Tietenberg (1989) and the more recent discussion in Endres (2011). However, neither of these two contributions addresses the questions raised by different understandings of compensation in terms of type and level, the issue at the core of the present paper. To the best of the authors’ knowledge, this paper is the first to deal with this topic.
The authors gratefully acknowledge that the following examples were provided by Eckard Rehbinder, Professor emeritus of Law, Goethe University Frankfurt, Germany. Special thanks also go to Martin Nettesheim, Professor of Law, University of Tübingen, Germany.
In line with most of the literature on the economics of liability law, the level of \(D\) is taken to be deterministic in the following analysis. The analysis of a scenario in which the level of harm is \(D(x,y,\theta )\) where \(\theta \in [\underline{\theta },\bar{\theta }]\) is a random variable according to the cumulative distribution function \(F(\theta )\), and \((x,y)\) are chosen in view of the distribution of \(\theta \) and \(s\) is chosen contingent upon the realized value of \(\theta \) would be qualitatively comparable.
In our extensions, we briefly refer to the case in which victims can also influence the probability of environmental harm.
For further elaboration, see Calcott and Hutton (2006) and Endres and Friehe (2012), for example. We make this assumption because it has already been established that strict liability cannot induce optimal decisions in the case of multi-causality. The two seminal sources for these fundamental insights in the field of law and economics are Landes and Posner (1980), p. 523, and Shavell (1987), Proposition 7.1, p. 178.
These gases have greater density than air. Therefore, they only disperse close to the origins of their emissions.
In earlier literature, CO2 was not considered to be a pollutant that generated “damage”. However, this view has evolved considerably in more recent discussions. See, for example, Greenstone et al. (2013).
In actual legislation, whether strict liability or negligence applies commonly depends on the activity. For instance, the Environmental Liability Directive of the European Union (Directive 2004/35/CE of the European Parliament and of the Council, Official Journal of the European Union L 143, 30.04.2004, 56–77) lists specific activities that are subject to strict liability.
We similarly do not address victims’ incentives to overstate the harm suffered. Such incentives are addressed, for example, in Friehe (2009b).
The scenario in which potential injurers and potential victims choose the precaution level at the same time is standard in the literature on the economics of liability (e.g., Shavell 2007). The consideration of leadership in care-taking is a possibly fruitful extension. Modeling this kind of strategic interaction would require that the injurer anticipates the safety effort of potential victims as a best response to his safety. This would introduce additional strategic aspects and thereby enrich (and considerably complicate) our analysis of the different regimes. Such aspects are discussed in Endres (1992) and Wittman (1981), for instance. However, they are beyond the scope of the present paper.
Note that we assume symmetric behavior by all \(n\) potential victims, an assumption that is validated in equilibrium.
Although the privately optimal level of clean-up is a function of the precautions exerted by the polluter and each victim (\(x\) and \(y\), respectively), this dependence is not evident in the conditions (15) and (17) below. This results from the fact that the injurer’s payoffs are independent of clean-up, as is apparent from (14), and because the victim adapts clean-up at stage 2 in a privately optimal way (which implies that there is no indirect cost effect).
The fact that \(C\le sD\) was explained in Sect. 2.
The level of \(s\) that figures in (25) is the same as that in (17) for a given combination \((x,y)\), because it is equal to \(s^*(x,y)\) in both cases. In other words, at a given combination \((x,y)\), differences in incentives cannot be attributed to different levels of anticipated clean-up. This simplifies the comparison of the regimes.
Note that RegimeCs induces \(s=1\), which is a distinction of this scheme relative to the other compensatory regimes; to simplify the exposition, this is not incorporated into the illustration.
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Endres, A., Friehe, T. The Compensation Regime in Liability Law: Incentives to Curb Environmental Harm, Ex Ante and Ex Post. Environ Resource Econ 62, 105–123 (2015). https://doi.org/10.1007/s10640-014-9817-5
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DOI: https://doi.org/10.1007/s10640-014-9817-5