A central challenge in securing property rights is the subversion of justice. We present a model of a polluter whose discharges harm multiple owners, and we compare property rules, liability rules, and regulation on efficiency grounds. We provide conditions under which property rules are preferred to liability rules, thus verifying the Calabresi-Melamed conjecture. Regulation that enforces partial abatement may be preferred to either of the extreme rules. An empirical analysis of water quality in the United States before and after the Clean Water Act shows that the effects of regulation are consistent with several predictions of the model.

Ponzetto acknowledges financial support from the European Research Council under the European Union's Horizon 2020 research and innovation program (CITIZINGLOBAL 714905), from the Spanish Ministry of Economy and Competitiveness (RYC-2013-13838) and the Severo Ochoa Programme for Centres of Excellence in R&D (CEX2019-000915-S), and from the Generalitat de Catalunya through the SGR Programme (2017-SGR-1393) and CERCA Programme.

Supplemental material files: online appendices; data archive