The choice of instruments for environmental policy: Liability or regulation?

We address in this paper the problem of comparing and choosing among different policy instruments to implement the incentive objective of an efficient deterrence of environmental degradation and the remedy objective of an efficient clean-up of damages and a proper compensation of victims. Two main instruments are considered, namely the assignment of legal liability for environmental damage, such as in the American CERCLA and in the European White Paper, including extended liability provisions, and the design of an incentive regulation framework. Our results derive from a formal and structured analytical approach to modeling the economic interactions between different decision makers such as governments, firms, regulators and financiers.