THE POLLUTER PAYS VERSUS THE POLLUTEE PAYS PRINCIPLE UNDER ASYMMETRICINFORMATION

This paper compares the ''pollutee pays principle'' with the ''pollute r pays principle'' in a model of one-sided externalities and asymmetri c information. Even allowing for mitigation through contracts-pollutio n reductions traded for subsidies or compensations-will not result in the perfect information social optimum, but will bias the outcome favo ring the one with the property right. While the pollutee pays principl e allows for global incentive mechanisms, such voluntary arrangements are severely restricted for the polluter pays principle. Indeed, these conditions for an out-of-court settlements-low damage and large benef its from pollution-somehow contradict the polluter pays principle. (C) 1998 Academic Press.