Premium
Taxation, Fines, and Producer Liability Rules: Efficiency and Market Structure Implications
Author(s) -
Hamilton Stephen F.
Publication year - 1998
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.1998.tb00133.x
Subject(s) - subsidy , liability , hazardous waste , product (mathematics) , business , industrial organization , market failure , economics , microeconomics , public economics , finance , market economy , geometry , ecology , mathematics , biology
This paper analyzes the comparative efficiency of producer liability rules and regulatory policy in short‐run and long‐run competitive equilibria with endogenous product safety. Pigouvian taxes on output and safety provision fail to achieve the long‐run social optimum. An appropriately designed policy involving fines on accidents and subsidies on safety provision achieves efficiency; however, the optimal policy may involve the taxation, not the subsidization, of product safety. Tort liability also leads to efficient outcomes but may be associated with perverse structural changes. For example, increased liability exposure may induce de novo entry in hazardous sectors, even with fully capitalized firms.