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Economic Incentives for Pollution Control

Two federal environmental statutes, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Oil Pollution Act of 1990 (OPA), provide liability for cleanup of releases of hazardous substances and petroleum, respectively, that pose a threat to human health and the environment. The statutes also provide for compensation for lost use of injured resources and for restoration of the environment. The incentive effect is clear, since environmental values in effect become part of the overall cost of doing business. Avoiding harm to the environment is good practice when it reduces the overall cost of doing business.

Several of the federal environmental statutes provide for civil and criminal liability for failure to comply with the law and implementing regulations. The incentive effect of this form of liability is to encourage individuals to comply with what are largely command and control regulations. Such an incentive is qualitatively different from the subject matter for this report: incentives that put a price on pollution that harms health, the environment, or natural resources. No study has attempted to address whether the existing level of penalties and enforcement produce the correct incentive effect (an optimal level of investment in pollution control). Excessive investment in pollution control is possible if entities seek to avoid penalties that are too harsh. Also possibility is too little effort at pollution if penalties are low and enforcement is lax.

Tort law is a fourth means through which liability encourages behavior that improves the state of the environment. Under tort law, individuals may seek compensation from polluters for harm to their property or person. The difficulty of proving harm caused by pollution, particularly chronic health effects, creates a severe barrier to such cases, meaning that many environmental costs will not be internalized through a liability mechanism. In fact, it is largely the failure of tort law to address many types of environmental harm that led to the passage of the principal environmental statutes.

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