In this paper we consider the design of optimal liability rules for illegal waste disposal problems using a model that includes the discharger, disposer, insurer and administration. The relationship between the discharger's responsibility and the discharger's demand for insurance are examined.
The main conclusions are as follows. Regardless of moral hazard problem by insurance, the discharger's incentives for prevention of unlawful dumping increase when he is liable for damages. Moreover, if the delegation cost is sufficiently small, the discharger necessarily delivers the industrial wastes to the appropriate disposer. Therefore, extension of liability to the discharger is always optimal when the delegation cost is sufficiently small. On the other hand, if the delegation cost exceeds a certain threshold, to prevent unlawful delegation it is not optimal to extend liability to the discharger contracting with an appropriate disposer.
JEL Classification: Q58, Q59