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Economiepublique 1592
Economiepublique 1592
07 | 2001/1
Analyse économique du droit
Édition électronique
URL : http://journals.openedition.org/economiepublique/1592
DOI : 10.4000/economiepublique.1592
ISSN : 1778-7440
Éditeur
IDEP - Institut d'économie publique
Édition imprimée
Date de publication : 15 janvier 2001
ISBN : 2-8041-3634-5
ISSN : 1373-8496
Référence électronique
Michael G. Faure, « Economic Analysis of environmental Law : An Introduction », Économie publique/
Public economics [En ligne], 07 | 2001/1, mis en ligne le 07 décembre 2005, consulté le 12 septembre
2020. URL : http://journals.openedition.org/economiepublique/1592 ; DOI : https://doi.org/10.4000/
economiepublique.1592
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INSTITUT D'ECONOMIE PUBLIQUE
Analysis of environmental
Law : An Introduction
Michael G. Faure
Université de Maastricht
1 Introduction
Thus this paper on the one hand attempts to show, without fancy
economic modelling, how traditional economic analyses (theory of re-
gulation, liability rules) can be used to analyse environmental law. This
may provide useful insights to lawyers wondering about the potential
use and applications of “law and economics” to environmental law. The
concrete application of well known theories to the specific field of envi-
ronmental law has the advantage that it immediately shows the useful-
ness of economic theory for legal doctrine and policy. At the same time,
a reminder of the classic theories of law and economics may be useful
for environmental economists as well who on the one hand some times
tend to be overenthousiastic of market based instruments, forgetting
some benefits of regulation (mainly information advantages) and so-
metimes neglecting that liability rules can be considered as a market
solution as well.
Turning back to the crucial question of this paper, how the law can
contribute to an internalisation of environmental harm, the first crucial
question is obviously whether environmental risks should primarily be
internalized via regulation or liability rules.
2 Environmental regulation
principle, the best information on the costs and benefits of the activity
that they undertake and of the optimal way to prevent accidents. This
”assumption of information” will, however, be reversed if it becomes
clear that some risks are not readily appreciated by the parties in an
accident setting. Therefore, for every activity the question that will have
to be asked is whether either the government or the parties involved
can acquire the information at the least cost.
When examining the pro and contra’s of liability versus regulation, the
administrative costs of both systems should also be compared. Lia-
bility rules are clearly costly in terms of time for both parties and in
court fees. A part of these costs is borne by the whole community, such
as e.g. the cost of the legal system, fees for the judges etc. Regulation
produces costs for the community, including the costs of making the
regulation, setting the standards, passing the statutes etc. and of sub-
sequent enforcement (see Shavell, 1984, 363-364).
In this respect the liability system seems to have an advantage :
the administrative costs of the court system are only incurred if an
accident has actually happened. The main advantage of the tort system
is that a lot of accidents will be prevented by the deterrent effect of being
held liable and having to pay damages to the victim. In case of safety
regulation the costs of passing the regulation and of enforcing it are
always there, whether there are accidents or not.
5 For alternatives to liability suits see Bocken, 1987, 83-87; 1988, 3-10.
become apparent some years after the emission took place. This will
bring proof of causation and latency problems, which will only make it
difficult for a lawsuit to be brought against the polluter.
For these reasons it is clear that some form of government re-
gulation of environmental pollution is necessary. To reformulate : this
shows that liability rules alone can not suffice to prevent environmen-
tal harm, but there might be other, publicly imposed, instruments than
the command and control type regulation which can be used to reach
this goal. Taxes are obviously such an alternative. But also these are
publicly imposed and can hence be considered as ’regulation’ Another
question, which will be discussed below, is whether this necessarily
implies that environmental law should solely depend upon regulation
or whether regulation can still fulfill a supplementary role.
licences, can be outdated fast and often lacks flexibility, which equally
merits a combination with tort rules.
Hence, from the above it follows that although there is a strong
case for safety regulation to control the environmental risk, tort rules
will still play an important role as well. Hence, the question arises what
the influence is of regulation on the liability system and vice versa. How
do these two systems mutually influence each other ?
8 Faure and Van den Bergh have also argued that an advantage of this system is that it gives
victims incentives to prove that the regulatory standard has been breached. This makes the
victim an enforcer of safety regulation. He can claim compensation under the negligence rule
as soon as a causal relationship between the violation of the regulatory standard and his
damage is established. See Faure and Van den Bergh, 1987, 110-111.
9 For a comparative analysis of the question whether following a permit excludes criminal
liability see, Faure and Oudijk, 1994, 86-91.
10 See Supreme Court (Hoge Raad) 30 January 1914, Nederlandse Jurisprudentie, 1914, 497;
Supreme Court 10 March 1972, Nederlandse Jurisprudentie, 1972, 278.
of the permit were set (see Rus-van der Veld, 1987, 111; Nieuwenhuis,
1991, 44-47). This point is made very clear in a famous case in the
Dutch Supreme Court that dealt with pollution caused by the French
salt mines in the Alsace region11 . The Salt Mines argued that the emis-
sions were within the limits set by their permit and, therefore, not
illegal. The court, however, judged that the licence had not taken into
account the potential harmful effects of the emissions for third parties
and could, therefore, not release the salt mines from liability.
One can find a clear economic rationale for this rule. If compliance
with a regulatory standard or licence would automatically result in a
release from liability, the potential injurer would have no incentive to
invest more in care than the regulation asks from him, even if additio-
nal care could still reduce the expected accident costs beneficially (see
Shavell, 1984, 365; Faure and Van den Bergh, 1987, 110). A first rea-
son to hold an injurer liable (if the other conditions for liability are met),
although he has followed the regulatory standard, is that this standard
is often merely a minimum. Exposure to liability will give the potential
injurer incentives to take all efficient precautions, even if this requires
more than just following the licence. A second reason is that exposure
to liability might be a good remedy for the unavoidable capturing and
public choice effects that play a role when permits are granted. If a
permit would always release from liability, all a plant operator would
have to do, is get a good permit with easy conditions from a friendly
civil servant. That would then exclude any law suit for damages from
a potential victim. Finally, tort law can also be seen as a ‘stopgap’ for
situations not dealt with by the statute (see Rose-Ackerman, 1992a,
123). This makes clear that the exposure to liability notwithstanding
the permit is an important guarantee that the plant operator will take
efficient care.
Therefore, following the conditions of a license or – more generally
– regulatory standards, should not have a justificative effect in tort. The
opposite may only be true if it were clear that the administrative agency
took into account all potential harm of all interested third parties when
setting permit conditions. In such case a judge in an civil liability suit
should not be “second guessing” efficient agency decisions. It is, howe-
ver, rare that agencies will be able to take ex ante all these interests and
possible damages into account when setting permit conditions. Hence,
as a general rule, following licenses or regulatory standards should not
free from liability; the opposite would be the exception. This is the case
both under a negligence as well as under a strict liability rule. Indeed,
holding an injurer liable, notwithstanding he followed regulatory stan-
dards will play an important role under a strict liability rule, since this
will lead the injurer to take efficient care and adopt an efficient activity
level, i.e. to take all efficient measures to reduce the potential accident
11 Supreme Court 23 September 1988, Rechtspraak van de Week, 1988, 150 and see Faure, 1991,
128-129.
costs, although this might require more to be done than the regulation
requires. Under a negligence rule this case law is also significant if the
efficient care standard (which is assumed to be equal to the due care
standard required by the legal system) is higher than the regulatory
standard.
4 Environmental liability
the court applies (see Adams, 1989; Diamond, 1974; Shavell, 1980).
Hence, under a negligence rule the injurer only has an incentive to
take efficient care (to escape liability) but not to adopt an efficient ac-
tivity level. Under a strict liability rule, on the contrary, an injurer has
an incentive to adopt an efficient activity level since this is also a way
to minimise the total expected accident costs which he has to bear.
Moreover, under negligence the injurer will only take the due care, the
legal system requires from him, but he has no incentive to take other
precautionary measures which could reduce the risk of environmental
damage. Strict liability has the advantage, that it gives incentives to
the injurer to take all efficient precautionary measures to reduce the
risk, also those which could not be incorporated into the due care le-
vel under negligence. In a unilateral accident model (whereby only the
behaviour of the injurer influences the accident risk) strict liability is
therefore the efficient liability rule since it leads both to efficient care
and to an optimal activity level.
12 See for Dutch case law e.g. the so called Jumbo II case of 1 October 1993, Nederlandse
Jurisprudentie, 1995, 182.
13 The economic rationale for this rule was discussed above.
tion14 , financial caps and other limitations on the victim’s rights were
introduced. The alleged compensating benefit of the strict liability in
those cases is therefore doubtful.
liability which should be mentioned. This concerns the fact that the ap-
plication of negligence requires high information costs from the judge,
who will have to set the due care standard. The information necessary
to weigh costs and benefits and fix the optimal care may not be readily
available for the judge. Strict liability shifts all costs to the injurer, who
will then have to define the optimal care level. If one therefore assumes
that, as may be the case with environmental harm, the information
on optimal precaution is better available with industry than with the
judges, this constitutes an argument for strict liability. This informa-
tion advantage may therefore constitute an additional argument in fa-
vour of strict liability for environmental harm. One should, however,
remember that this finding only holds in all the models, such as the
one which is e.g. developed by Shavell, which start from an assumption
of risk neutrality. If risk aversion is introduced and the potential inju-
rer is risk averse, Endres/Schwarze correctly argue that strict liability
is only efficient if in some way risk can be removed from the risk averse
injurer, e.g. through insurance (see Endres and Schwarze, 1991).
There are other reasons why the seemingly advantage of strict lia-
bility should be somewhat balanced. First of all, it was assumed until
now that the injurer has money at stake to pay compensation to the
victim. If, however, the amount of the damage exceeds the injurer’s
wealth, a problem of underdeterrence will arise. Under strict liability
the injurer will consider the accident as one which is equal to his to-
tal wealth and will therefore only take the care necessary to avoid an
accident with a magnitude equal to his total wealth. If that wealth is
lower than the magnitude of an accident he will take less than the op-
timal care and therefore a problem of underdeterrence arises under
strict liability. Insolvency is less of a problem under negligence since
under that rule the injurer will still have an incentive to take the care
required by the legal system as long as the costs of taking care are less
than his individual wealth. Taking due care remains indeed a way for
the injurer to avoid to have to pay compensation to the victim. If there
would thus be a potential accident setting whereby the magnitude of
the loss may be higher than the injurer’s wealth (which can often be the
case in environmental liability) this constitutes an argument in favor
of negligence rather than strict liability.
harm which originates from hazardous activities. For all the damage
originating from other activities the Commission proposes a negligence
rule.
This original approach of the European Commission is very much
in line with the predictions of the economic model as presented above.
Hazardous activities can often be considered unilateral and in those
situations it is important to control the injurer’s activity through a strict
liability rule. The same is, however, not true in case of non-hazardous
activities which may cause environmental harm. The dividing line (non-
hazardous/hazardous) chosen by the European Commission, seems
therefore to follow economic logic.
5 Concluding remarks
16 Compare Easterbrook, 1983, 289-332 who argues the same with respect to those who would
reject a deterrence-based approach to criminal law.
References
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Bocken, H., 1987 and 1988, “Alternatives to Liability and liability in-
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