Corrective Taxation versus Liability

15 Pages Posted: 10 Jul 2010  

Steven Shavell

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 8, 2010

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.

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

Steven Shavell (Contact Author)

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