An Assessment of Legal Liability
as a Market-Based Instrument
Early environmental policies relied primarily on command-and-control approaches to changing polluter behavior. However, recognition of the potentially high costs associated with these policies, due in large part to their inflexibility, prompted scholars and policy makers to search for alternatives that were more flexible and less costly. Environmental economists have advocated policies that rely on the pricing of environmental services, such as taxes and marketable permits. Such policies make polluters pay for consumption of environmental services or, equivalently, deterioration of environmental quality, in the same way that they pay for other inputs, such as labor, land, and capital.
Market-based instruments have been advocated primarily as means to control environmental contaminants that are emitted continuously as a known and anticipated by-product of some production process. Examples include sulfur dioxide (SO2) emissions and continuous waste discharges into water bodies. However, pricing policies can also be used for environmental concerns that stem from the unintentional and unanticipated release of hazardous substances, or environmental accidents. Examples include oil spills, unanticipated chemical releases, leaking underground storage tanks, and the leaching of pesticides or landfill wastes into soil and surface water or groundwater. In this context, polluters can be made to pay for consumption of environmental services through the imposition of legal liability for the damages associated with environmental contamination. The rule of strict liability requires polluters to pay for damages whenever they occur, regardless of whether the polluter took reasonable steps to avoid them. It is thus equivalent to a pricing rule under which a