Deposit-refund System and Liability for Damages of Soil Contamination

Abstract

This paper examines liability rules for soil contamination damages with the land lender-borrower (principal-agent relationship) framework. The distinctive features of this paper are the focus on soil contamination problems and the classification of the liability for the damages into two responsibilities: the responsibility for the cleanup/removal of hazardous materials (the primary responsibility) and the responsibility for health damages (the secondary responsibility). The question now arises: What is the most desirable liability rule that has provisions for the sharing of responsibility between the land lender and the borrower for primary/secondary damages? In order to approach this problem, this paper deals with the following two types of liability rules, and analyzes each liability rule as a policy instrument from the perspective of efficiency. The simple liability rule (SLR) is one type of rule. SLR provides only the share of lander-borrower of each responsibility regardless of the contamination or health damages. The state contingent liability rule with the deposit-refund system (SCLRDS) is the other type of rule. SCLRDS provides the share of each responsibility and the deposit-refund system according to the state of the contamination and health damages. This paper shows that under SLR, the government cannot affect the discharge reduction/prevention effort level, nor the social welfare in spite of responsibility sharing rule; on the other hand under SCLRDS, the first-best outcome can be achieved. © 2005, JAPAN SECTION OF THE REGIONAL SCIENCE ASSOCIATION INTERNATIONAL. All rights reserved.