The Polluter Pays versus the Pollutee Pays Principle under Asymmetric Information,

This paper compares the “pollutee pays principle” with the “polluter pays principle” in a model of one-sided externalities and asymmetric information. Even allowing for mitigation through contracts—pollution reductions traded for subsidies or compensations—will not result in the perfect information social optimum, but will bias the outcome favoring the one with the property right. While the pollutee pays principle 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 benefits from pollution—somehow contradict the polluter pays principle