October, 2011

The Rise and Fall of the Polluter-Pays Principle in Developing Countries

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The polluter-pays principle stipulates that the person who damages the environment must bear the cost
of such damage. A number of developing countries have recently extended this principle to create an obligation
on the state to compensate the victims of environmental harm. This variation of the polluter-pays
principle is aimed at ensuring victims’ compensation when polluters cannot be identified or are insolvent
and at providing stronger incentives for local governments’ monitoring of environmentally risky activities.
These regimes hold local governments primarily or jointly-and-severally liable for environmental
damage and allow them to act in subrogation against the polluters. In this paper we study the effect of
these forms of governmental liability on the polluters’ incentives and on aggregate levels of environmental
harm. We develop an economic model to study the conditions under which governmental liability
may be preferable to direct polluters’ liability as an instrument of environmental protection. We conclude
by suggesting that these variations of the polluter-pays regime may be desirable in environments
characterized by widespread poverty, high interest rates, judicial delays and uncertainty in adjudication.

The polluter-pays principle stipulates that the person who damages the environment must bear the costof such damage. A number of developing countries have recently extended this principle to create an obligationon the state to compensate the victims of environmental harm. This variation of the polluter-paysprinciple is aimed at ensuring victims’ compensation when polluters cannot be identified or are insolventand at providing stronger incentives for local governments’ monitoring of environmentally risky activities.These regimes hold local governments primarily or jointly-and-severally liable for environmentaldamage and allow them to act in subrogation against the polluters. In this paper we study the effect ofthese forms of governmental liability on the polluters’ incentives and on aggregate levels of environmentalharm. We develop an economic model to study the conditions under which governmental liabilitymay be preferable to direct polluters’ liability as an instrument of environmental protection. We concludeby suggesting that these variations of the polluter-pays regime may be desirable in environmentscharacterized by widespread poverty, high interest rates, judicial delays and uncertainty in adjudication.

 

Continue reading at: Elsevier