Recent changes in the US liability regime for oil pollution damage have int
ensified a policy debate about environmental liability limits. Economic the
ory suggests that some type of limit may be needed under certain conditions
, and that such a limit should be set so that the marginal social benefit a
nd cost are equal. However, it is unclear how a liability limit may be dete
rmined specifically for tanker shipping in US waters. We first examine cond
itions under which corner solutions (no liability or unlimited liability) a
re desirable. We then formulate a model to determine a socially optimal lia
bility limit for oil pollution damage in US waters when a non-zero, finite
liability limit is desirable. The model captures the tradeoff between less
expensive energy supply and more stringent protection of the marine environ
ment. Numerical simulations illustrate the properties of the model and majo
r factors affecting the public policy decision regarding a liability limit.
(C) 1999 Elsevier Science Ltd. All rights reserved.