American Economic Review: Vol. 101 No. 3 (May 2011)


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Corrective Taxation versus Liability

Article Citation

Shavell, Steven. 2011. "Corrective Taxation versus Liability." American Economic Review, 101(3): 273-76.

DOI: 10.1257/aer.101.3.273


Taxation and liability are compared as means of controlling harmful externalities, with a view toward explaining why the use of liability predominates over taxation. Taxation suffers from a disadvantage in the analysis: because taxes do not reflect all the variables affecting expected harm, inefficiency results, whereas efficiency under liability requires only assessment of actual harm. However, liability also suffers from a disadvantage: incentives are diluted because injurers escape suit. Joint use of taxation and liability is examined, and it is shown that liability should be employed fully, with taxation taking up the slack due to escape from suit.

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Shavell, Steven (Harvard U)

JEL Classifications

H23: Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
K34: Tax Law

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