An Economic Analysis of the regulatory Compliance Defense

Tort law and regulation are two distinctive tools for a society to control dangerous activities and provide market participants with incentives to internalize the external costs of their harmful activities. Tort law is a traditional way to fulfill this purpose by means of threatening potential tortfeasors with possible liability. Since victims and injurers are private parties and tortious actions are private lawsuits initiated by victims and ruled by judges, tort law is recognized by economists as a kind of market-oriented way to control harmful activities without too much intervention from the state. Regulation, to the contrary, is made by public authorities with a clear intention to intervene in market activities such as inducing compliance with relevant regulatory standards by sanctions or levying a tax on polluters. Nevertheless, regulation is still a prevalent tool to control externalities in a modern society.