ABSTRACT
Natural Resource Damage (NRD) resulting from production activities represents a market failure for two reasons: first, the environment is a public good that may not be appropriated and, therefore, has no market clearing factor or output price; second, damage to the environment is considered a negative externality, a social cost not fully internalized within the accounts of the parties causing it (Cropper and Oates 1992) that is imposed on the whole community (Monti 2003).1 Following Pigou (1918), a socially optimal allocation of resources in the presence of such market failure requires the producer to bear the cost that the externality imposes on society. This provides an economic rationale for regulation (Alberton 2003; Germani 2004). In most developed countries two main regulatory approaches have evolved
to address these market failure problems: an ex ante system (command and control regulation)2 and an ex post system (a liability regime). A control is ex ante if it is applied before, or, at least, independently of, the occurrence of harm, while ex post controls are applied after the damage has occurred and been detected. There is a substantial body of work that investigates the optimal use of these two systems, and a general consensus that some combination of these systems is generally desirable. The common ground in these works is that these regulatory systems are not mutually exclusive (Germani 2004; Shavell 1987).3
