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.
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