A principal's production decision imposes a negative externality on an agent. The principal may be a pollution … pollution. Then the agent privately learns the disutility of pollution. Finally, a production level and a transfer payment are … standard adverse selection models of pollution claim settlements, there may thus be too much pollution compared to the first …

harmful externalities, its actual use has been limited, mainly to the domain of pollution. Liability, in contrast, has great … importance in controlling harmful externalities. I compare the tax and liability here in theory and suggest that the conclusions … help to explain the observed predominance of liability over taxation, except in the area of pollution. The following …