Working Paper BETA #2015-08

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Title : Replacing the Polluter Pays Principle by the Cheapest Cost Avoider Principle: On the Efficient Treatment of External Costs.

Author(s) : Dieter Schmidtchen, Jenny Helstroffer , Christian Koboldt

Abstract : Crucial to the analysis in this paper is the Coasian insight that external costs result from conflicting uses of scarce resources and that responsibility for these costs should not be attributed exclusively to polluters as required by the polluter pays principle (PPP). The paper argues that the PPP, unlike the cheapest cost avoider principle (CCAP), which requires resolving the conflicting use at the lowest possible costs, suffers from three partly related deficits that can cause avoidable welfare losses: First, focusing on polluters as the only addressees of regulatory measures ignores the role of pollutees and government; second, the PPP is incapable of dealing with second-best problems that may arise from government as an additional investor, inefficient behavior of the pollutees or the existence of monopolies; third, the PPP provides insufficient guidance in case of multiple equilibria, corner solutions and administration costs. In addition, the paper discusses whether the shortcomings of the PPP can be compensated by advantages in terms of lower administration costs.

Key-words : Externalities, Polluter Pays Principle, Cheapest Cost Avoider, Second Best, Coase, Pigovian Tax.

JEL Classification : D04, D61, D62, H21, H23, K23.