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| Author: | Hutchinson, E. Veld, K. van 't |
| Title: | Extended liability for environmental accidents: what you see is what you get |
| Journal: | Journal of Environmental Economics and Management
2005 : JAN, VOL. 49:1, p. 157-173 |
| Index terms: | accidents bankruptcy environment liability risk |
| Language: | eng |
| Abstract: | When a firm may be bankrupted by the liability from an environmental accident, current laws often allow for the extension of liability to third parties with whom the firm contracts, with the aim of inducing full internalization of social costs. It is found that when a firm can take both observable and unobservable care to reduce expected accident damages, extended liability indeed results in full cost internalization, but not in first-best level of care. It is also shown that, whereas without extended liability there is excess entry into environmentallly hazardous industries, introducing extended liability leads to exit that, while excessive relative to the first best, is second-best optimal given firms' choice of care |
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