A Comparison of Taxes, Regulation, and Liability Rules under Imperfect Information

ECONOMISTS have devoted a great deal of ink and effort over the past several years to analyzing the effects of existing and alternate government regulatory programs in the pollution area and asking what type of program can best achieve the government's regulatory goals. Much of the debate has focused on comparing the effects of price incentive approaches (effluent taxes or subsidies), quantity controls or liability rules as alternate regulatory instruments for achieving the same goals.1 Much of the literature makes the assumption of perfect information. However the choice among regulatory instruments depends in practice not only on their theoretical qualities, but also on the costs of translating theory into practice. Different programs may be more or less costly to administer because information requirements differ, because uncertainty affects them in different ways, or because more or less difficult administrative decisions need to be made more or less frequently. In this paper we present a simple general framework for analyzing the costs of operating different types of pollution control programs under the