The Rise and Fall of Polluter-Pays Principle in Developing Countries

The polluter-pays principle stipulates that the person who damages the environment must bear the cost of such damage. A number of developing countries have recently extended this principle to create an obligation on the state to compensate the victims of environmental harm. This variation of the polluter-pays principle is aimed at ensuring victims’ compensation when polluters cannot be identified or are insolvent and at providing stronger incentives for local governments’ monitoring of environmentally risky activities. These regimes hold local governments primarily or jointly-and-severally liable for environmental damage and allow them to act in subrogation against the polluters. In this paper we study the effect of these forms of governmental liability on the polluters’ incentives and on aggregate levels of environmental harm. We develop an economic model to study the conditions under which governmental liability may be preferable to direct polluters’ liability as an instrument of environmental protection. We conclude by suggesting that these variations of the polluter-pays regime may be desirable in environments characterized by widespread poverty, high interest rates, judicial delays and uncertainty in adjudication.