By: Daniel B. Kelly
The conventional problem with externalities is well known: Parties often generate harm as an unintended byproduct of using their property. This Article examines situations in which parties may generate harm purposely, in order to extract payments in exchange for desisting. Such “strategic spillovers” have received relatively little attention, but the problem is a perennial one. From the “livery stable scam” in Chicago to “pollution entrepreneurs” in China, parties may engage in externality-generating activities they otherwise would not have undertaken, or increase the level of harm given that they are engaging in such activities, to profit through bargaining or subsidies. This Article investigates the costs of strategic spillovers, the circumstances in which threatening to engage in these spillovers may be credible, and potential solutions for eliminating, or at least mitigating, this form of opportunism through externalities.
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