On the optimal environmental liability limit for marine oil transport

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.