Abstract

The total social harm caused by everyone is often verifiable, and the harm that each actor causes is often unverifiable. In these circumstances, the authorities lack the information necessary to implement the usual liability rules or externality taxes. We propose a novel solution: hold each participant in the activity responsible for all of the excessive harm that everyone causes. By excessive harm we mean the difference between the total harm caused by all injurers and the optimal total harm. We show that the rule of total liability for excessive harm creates incentives for efficient precaution and activity level. Consequently, actual harm is not excessive and actual liability is nil. The authorities gain control over social harm without having to monitor individuals, and individuals do not have to pay damages or conform to bureaucratic regulations. This rule has many practical advantages, especially in cases involving harm to the environment.

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