NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Cleanup and Liability After Environmentally Harmful Discharges

A. Mitchell Polinsky, Steven Shavell

NBER Working Paper No. 4176
Issued in September 1992
NBER Program(s):   LE

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.

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Document Object Identifier (DOI): 10.3386/w4176

Published: "A Note on Optimal Cleanup and Liability After Environmentally Harmful Discharges," Research in Law and Economics, 1994, Vol. 16, 17-24.

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