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The Law and Economics of the Environment

Edited by Anthony Heyes

This outstanding book focuses on how economics can contribute to the design, implementation and appraisal of legal systems that create the ‘right’ incentives for environmental protection. The sixteen original and specially commissioned contributions – written by some of the leading names in their field – span many of the important areas of contemporary interest and employ case study material combined with theoretical, empirical and experimental research.
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Chapter 3: The vertical extension of environmental liability through chains of ownership, contract and supply

James Boyd and Daniel Ingberman


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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