Firms are almost always making irrevocable decisions about output and investment in production capacity when there is uncertainty about future prices, demand for their products, and availability and cost of inputs. In some cases, an important source of uncertainty for a firm is the possible liability arising from the disposal of its hazardous wastes. A generator of hazardous wastes may find itself responsible for the entire cleanup of a contaminated waste disposal site if the company that operated that disposal site goes bankrupt. Presumably, a generator facing such a risk will judiciously choose the waste management facility it uses, balancing current disposal costs with potential future liability.
In accordance with the U.S. Resource Conservation and Recovery Act (RCRA, 1976, 1984) and state hazardous waste laws, the storage, treatment, disposal, and transportation of hazardous wastes in the U.S. are heavily regulated by a system of permits, technical and construction specifications, criteria for documenting facilities' operating and financial performance, and closure and postclosure requirements.
Over the years, improper storage and disposal of toxic substances and hazardous waste have indeed resulted in a large number of sites where soil, groundwater, and surface water are contaminated and pose significant risks to human health and ecological systems. In 1980, Congress passed legislation (CERCLA, commonly dubbed "Superfund") to address discontinued and abandoned disposal sites, holding certain parties - to be sought among the generator(s) and transporter(s) of the hazardous wastes, and the operator of the disposal site responsible for the cost of cleaning them up.(1) In addition to being retroactive, Superfund liability is strict, in that the U.S. Environmental Protection Agency (EPA) does not have to prove that these parties were negligent. It is also joint-and-several, allowing the agency to hold any one party (including the generator) responsible for the entire cost of cleanup at sites used by many firms, if it is not possible to establish each party's contribution to the contamination problem and/or some parties are no longer in existence.
In analyzing the consequences of such a complex system, some observers (Wentz, 1989; Freeman, 1989) argue that the pace at which uncontrolled hazardous waste sites will be proposed for inclusion in the Superfund program (or state "mini-superfund" programs) in the future depends crucially on how successful the RCRA program is in preventing such sites. The RCRA and Superfund programs have prompted many firms to store and treat wastes on-site, in hopes of better monitoring operations; over 95% of all hazardous waste generated in the U.S. is stored or treated on-site by the generator (Wentz, 1989).
In theory, potential liability for cleanup costs should deter firms from carelessly handling hazardous waste (Tietenberg, 1989). Large firms are expected to be particularly sensitive to the incentives created by liability: Economic theory shows that firms with relatively low levels of assets are partially sheltered from liability (Shavell, 1984) and that firms can pick their corporate structure and financing specifically to avoid liability (Pitchford, 1995). Empirical evidence (Harper and Adams, 1996) indeed shows that the EPA was targeting large and wealthy firms, especially in the early years of the Superfund program.
One would then expect that generators that ship wastes off-site would want to use reliable commercial facilities with assets sufficient to promptly handle accidental releases of pollutants into the environment. However, the complex technical standards and insurance requirements imposed on waste disposal and treatment would seem to leave little opportunity for departing from prescribed performance standards. If so, commercial waste facilities may appear equally "safe" in the eyes of a generator of hazardous waste, and the primary factors influencing a generator's choice of waste management facility should be cost considerations. …