Chapter 3: The vertical extension of environmental liability through chains of ownership, contract and supply
James Boyd and Daniel Ingberman INTRODUCTION When pollution creates a social loss, who should be liable? Common sense, standard legal doctrine and notions of economic efficiency agree that liabilities should be assigned to the polluters. But what if the polluter is unable to pay? When the polluter’s wealth is insufficient to internalize damages, liability is often extended to its business partners, even if the business partners are substantially removed from involvement with the polluting activity. This chapter describes the rationale for extended liability and its use in environmental law. Extended liability improves incentives for precaution. But while extended liability improves cost internalization and deterrence, it need not improve welfare. The ways in which extended liability can reduce welfare are the focus of this analysis.1 Extended liability can lead to a set of liability avoidance strategies that distort production decisions. In this chapter we describe three such strategies. First, potentially liable firms can minimize the capital intensity of production, in order to expose less capital to future tort claims. Second, firms may avoid otherwise desirable contractual relationships in order to avoid exposure to liabilities externalized by their business partners. Third, when liabilities are long-tailed (that is, latent), firms can dissolve prematurely in order to avoid future liability. These strategies may be privately rational when liability is extended. They are distorting, however, since they lead to social production costs that are higher than they would otherwise be. The chapter is organized as follows. First, we describe the rationale for extended liability and...
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