harmful externalities, its actual use has been limited, mainly to the domain of pollution. Liability, in contrast, has great … help to explain the observed predominance of liability over taxation, except in the area of pollution. The following …

develops technologies which reduce the cost of pollution abatement. The innovating firm can patent this innovation and use a … licensing fee to generate revenue. In a world of certainty, the first best level of innovation and abatement can be supported by … either a pollution tax or a marketable permit. However, the returns to the innovator from innovation are not the same under …