Abstract
Taxation and liability are compared here as means of controlling harmful externalities. It is emphasized that liability has an advantage over taxation: inefficiency of incentives arises under taxation when, as would be typical, it would be impractical for a tax to reflect all variables that significantly affect expected harm, whereas efficiency of incentives under liability does not require the state to determine expected harm – it requires only that injurers pay for harm that occurs. However, taxation enjoys an advantage over liability: incentives under liability are diluted to the degree that injurers might escape suit. The optimal joint use of taxation and liability is also examined, and it is shown that liability should be employed fully because liability creates more efficient incentives than taxation; a tax should be used only to take up the slack due to the possibility that suit for harm would not be brought.
Highlights
The probability and seriousness of an oil spill due to an oil tanker accident will depend on the the strength of the tanker’s hull and the vulnerability of fishing activity and tourism to a spill; and the expected harm from a crane accident will depend on characteristics of the crane and the exposure to risk of nearby buildings and passersby
Equal expected harm, so injurers would choose optimal levels of activity. This would occur without the state needing information about the danger of activities; to impose liability requires only that the state determine the harm that eventuates
Liability should be employed fully because it creates a more efficient incentive than taxation; the tax should be used only to take up the slack due to the possibility that suit for harm would not be brought
Summary
Shavell, Steven. 2011. “Corrective Taxation versus Liability.” American Economic Review 101 (3): 273–76. https://doi.org/10.1257/ aer.101.3.273. This article was downloaded from Harvard University’s DASH repository, and is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http:// nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-ofuse#OAP
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