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Corrective Taxation versus Liability

Steven Shavell

Harvard Law School; National Bureau of Economic Research (NBER)

July 8, 2010

Harvard Law and Economics Discussion Paper No. 671

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.

Number of Pages in PDF File: 15

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Date posted: July 10, 2010  

Suggested Citation

Shavell, Steven, Corrective Taxation versus Liability (July 8, 2010). Harvard Law and Economics Discussion Paper No. 671. Available at SSRN: https://ssrn.com/abstract=1636357 or http://dx.doi.org/10.2139/ssrn.1636357

Contact Information

Steven Shavell (Contact Author)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Harvard Law School ( email )
1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
617-495-3668 (Phone)
617-496-2256 (Fax)
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