The “Polluter Pays Principle”: Should Liability be Extended When the Polluter Cannot Pay?

Abstract

This paper has analyzed the effect of extending liability from "polluters"--whose actions directly influence risks--to "contractors" who contribute to risk only through their use of polluter's product or service. Extended liability is considered in two forms, proportional and joint and several. The analysis features a market in which transactions are endogenous to the liability rule. As a result, contractors' liability for polluters' externalized damages leads different contractor types (distinguished by wealth) to seek polluters of different capitalization and safety. And when liability is joint and several, wealthy contractors wish to avoid bearing the liability shares of less wealthy contractors. In this case, contractors may avoid a given polluter simply because less wealthy contractors purchase from it. For these types of reasons, extended liability can distort a market's otherwise efficient patterns of vertical or horizontal integration. The potential benefit of extended liability is that it allows for greater cost internalization and, by inference, more efficient polluter capital and safety investments. However, this benefit must be balanced against potential lost production efficiencies. [ABSTRACT FROM AUTHOR]