Transport, Welfare and Externalities

Transport, Welfare and Externalities

Replacing the Polluter Pays Principle with the Cheapest Cost Avoider Principle

New Horizons in Law and Economics series

Dieter Schmidtchen, Christian Koboldt, Jenny Helstroffer, Birgit Will, Georg Haas and Stefan Witte

This book discusses a paradigm shift for dealing with the internalization of external costs in transport. Crucial to the analysis is the insight that the polluters are not the only cost drivers; both pollutees and the state can also contribute to reducing social costs. The authors show that applying the Cheapest Cost Avoider Principle (CCAP) instead of the Polluter Pays Principle (PPP) can lead to substantial welfare improvements.

Chapter 5: Replacing the Polluter Pays Principle with the Cheapest Cost Avoider Principle

Dieter Schmidtchen, Christian Koboldt, Jenny Helstroffer, Birgit Will, Georg Haas and Stefan Witte

Subjects: economics and finance, environmental economics, transport, environment, environmental economics, transport, urban and regional studies, transport

Extract

When damages can be avoided or mitigated by either of two parties, the CCAP suggests that the party which can prevent or mitigate the damage at the lowest costs should take action, on the condition that the costs of preventing or mitigating harm is lower than the benefit. This is the ex ante version of the CCAP. The ex post version refers to a situation in which damage has already occurred. The application of the CCAP requires four steps. The first step consists in identifying the possible actors who can influence the outcome. Possible actors can be the polluters, the pollutees or a third party, such as government. The second step identifies alternative ways in which the outcome can be altered. In the third step the minimum costs of the various methods figured out in step two are calculated. In the fourth step the least costly method and the corresponding actor or actors connected to it are chosen.1 Note that if the benefits of taking action are lower than the costs of the least costly method, nothing should be done. Identifying the cheapest cost avoider is one thing; it is another problem to make sure that the cheapest cost avoider rather than the highest cost avoider has the incentive to behave in an optimal manner, or, in the case that more than one party should take care, that the optimal combination is realized. We will take up this issue after having analysed the working properties of the CCAP. We start...

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