Berkeley Program in Law and Economics

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 creating 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. These regimes hold state and local governments primarily or jointly-and-severally liable for environmental damage and allow the government to act in subrogation against the polluters. In this paper we study the effect of this form of governmental liability which we describe as the polluter-does-not-pay regime on the polluters’ incentives and on aggregate levels of environmental harm. We develop an economic model to study the polluter-does-not-pay principle, identifying the conditions under which this regime may be a more effective instrument for environmental protection. We conclude suggesting that this regime may be desirable in environments characterized by widespread poverty, high interest rates, judicial delays and uncertainty in adjudication.