Chapter 6: The economics of clean-up and implications for legal design
Carl V. Phillips and Richard J. Zeckhauser* INTRODUCTION Most environmental regulation depends on the setting of standards. If environmental quality falls below the standard, the responsible party is deemed to be a violator. The penalties are usually civil, though in rare cases they are criminal. In this manner, the government’s role in ensuring environmental quality is analogous to its role in ensuring civil rights: punishment is to be meted out – through fines or mandates for compliance – if particular lines are crossed. In both areas, private liability actions are often the first step in identifying violations. The civil rights approach to environmental protection departs sharply from economics-based models for environmental regulation, which are sometimes called ‘second generation’ regulations. One aspect of the economics-based approach is the theory that potential polluters should be given appropriate incentives to reduce pollution, whatever its current level, and that efficient pollution levels are found when the benefits of reducing pollution just equal the costs of achieving the reduction.1 Since both incremental benefits and costs may depend on local circumstances, particular standards of quality are not sacrosanct. Though it violates many economists’ norms, the standards system does put some economic incentives into action by encouraging privately instigated litigation and liability-based damages in many situations. A strength of the system is that the incentives to avoid injuring natural resources are in some sense proportional to the level of harm avoided. An important disadvantage of the environmental liability system is that its arbitrariness, uncertainty, high transactions costs, and misguided...
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