In previous chapters we have focused on environmental problems that are characterized by a flow of emissions or an ambient concentration of pollution that arise from production activities. In these cases, emissions were closely linked to a firm's technology, output level, and abatement activity. In many instances, however, environmental damage is the result of an acute accident that can occur with some probability. In these cases it is the level of accident prevention effort that influences the likelihood that environmental damage occurs. There are several well-known examples of this. In 1989 the oil tanker Exxon Valdez ran aground in Alaska's Prince William Sound, causing what, at the time, was the largest discharge of oil into US waters. The size of this spill was eclipsed by the 2010 BP/Deepwater Horizon oil spill in the Gulf of Mexico. Both of these accidents might have been prevented with additional care. In the case of Exxon, more could have been invested in training qualified officers to guide the ship; the BP spill occurred in part due to sub-par construction practices. Nuclear disasters such as Chernobyl in Russia, where insufficient maintenance was a culprit, and more recently Fukushima in Japan, where additional safety measures were available but not deployed, are further examples.

The emission- and ambient-based policies that we have previously examined are ill-suited for addressing discrete-event environmental accidents of these types. Instead, policies need to address the incentives that potential polluters have to minimize the likelihood that an accident occurs. In this chapter we focus on such a regulatory environment, where the goal is to achieve a socially optimal level of accident prevention effort. We begin by defining an economically efficient level of accident prevention effort, and then present legal frameworks that provide incentives for private enterprises to deploy the efficient effort. We will see that simple liability rules work well when firms are wealthy enough to pay for any accident-related damages they cause. Things are more complicated, however, when the possibility of bankruptcy exists, in that a firm will behave differently when the amount it is liable for is capped by its current assets. In such cases, a firm's accident prevention effort only provides private benefits if the firm remains solvent, which changes its incentives in ways that lead to an inefficient level of accident prevention effort.