Journal of Real Estate Finance and Economics, 15: 2, 143±159 (1997)
# 1997 Kluwer Academic Publishers
Legal Liability as an Environmental Policy Tool:
Some Implications for Land Markets
Department of Economics, University of Connecticut, Storrs, CT 06269-1063
This article considers the use of legal liability as a tool for internalizing environmental externalities, considering
speci®cally the implications for land markets. The discussion focuses on liability under CERCLA. A simple
model of land markets is used to evaluate alternative assignments of liability in terms of their impacts on
decisions to buy and sell property and to invest in pollution abatement. The results suggest that the existence of a
land market can alter the effect of the liability rule. In some cases the land market can eliminate an inef®ciency
that would otherwise exist, while in other cases it can create one.
Key Words: liability, CERCLA, environmental contamination
Most analyses of environmental policy instruments draw a distinction between price-based
instruments (such as emissions taxes) and quantity-based instruments (such as traditional
Alternatively, a distinction can be made between ex
ante instruments, which are imposed at the time an externality-generating activity takes
place, and ex post instruments, which are triggered when damages from that activity
Both emission taxes and traditional regulatory approaches are examples
of ex ante instruments. The classic example of an ex post instrument is legal liability
Legal liability has been increasingly used as either an alternative to or a complement to
other ex ante instruments.
While the imposition of liability for pollution damages has
always been possible under common law,
it has increasingly been imposed statutorily.
The most notable example is the liability for contamination from hazardous waste that has
been imposed under the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA).
However, many other examples of statutorily imposed liability
for pollution damages exist as well.
As with all environmental policy instruments, liability has been used as a mechanism
for creating incentives for polluters to reduce pollution damages by either reducing the
level of the externality-generating activity or changing the manner in which the activity is
conducted (e.g., engaging in more precaution or ``care''). Typical analyses of liability
have focused on these effects.
However, liability can affect more than just output and care
decisions. For example, when liability relates to contamination of a given piece of land, it