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Modelling the choice between regulation and liability in terms of social welfare
Author(s) -
Boyer Marcel,
Porrini Donatella
Publication year - 2004
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/j.0008-4085.2004.00239.x
Subject(s) - incentive , profitability index , liability , damages , welfare , microeconomics , economics , social welfare , private information retrieval , space (punctuation) , information asymmetry , public economics , actuarial science , business , finance , market economy , computer science , computer security , political science , law , operating system
. Using a formal political economy model with asymmetric information, we illustrate the conditions under which an environmental protection system based on extending liability to private financiers is welfare superior, inferior, or equivalent to a system based on an incentive regulatory scheme subject to capture by the regulatees. We explicitly consider the following factors: the cost of care and its efficiency in reducing the probability of an environmental accident, the social cost of public funds, the net profitability of the risky activities, the level of damages, and the regulatory capture bias. We characterize in such a parameter space the regions where one system dominates the other. JEL classification: D82, K32