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<p>In <i>The Wealth of Nations</i>, Adam Smith (1776) advocated for the role of the legal system in “protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it (Smith 1776, V.i.b.1, p.340).” In this paper, we examine the use of legal remedies of liability and negligence rules as an alternative to direct regulation to achieve optimal deterrence of environmental accidents under imperfect competition. When safety investment can be observed, we demonstrate that a socially optimal resource allocation can be attained in the private market through the enforcement of property rights through a combination of tort liability and <i>ex post</i> negligence rules. When safety investment cannot be observed, we show the optimal policy combines <i>ex ante</i> bonding requirements for safety investment with tort liability and <i>ex post</i> negligence rules.</p>

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Imperfect Competition and the Optimal Deterrence of Environmental Accidents

  • 期刊论文

  • 发表日期：

    2026年3月19日

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  • Stephen F. Hamilton,
  • Harrison Ridland,
  • David L. Sunding

摘要

In The Wealth of Nations, Adam Smith (1776) advocated for the role of the legal system in “protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it (Smith 1776, V.i.b.1, p.340).” In this paper, we examine the use of legal remedies of liability and negligence rules as an alternative to direct regulation to achieve optimal deterrence of environmental accidents under imperfect competition. When safety investment can be observed, we demonstrate that a socially optimal resource allocation can be attained in the private market through the enforcement of property rights through a combination of tort liability and ex post negligence rules. When safety investment cannot be observed, we show the optimal policy combines ex ante bonding requirements for safety investment with tort liability and ex post negligence rules.