Taxation and liability are compared as means of controlling harmful externalities, with a view toward explaining why the use of liability predominates over taxation. Taxation suffers from a disadvantage in the analysis: because taxes do not reflect all the variables affecting expected harm, inefficiency results, whereas efficiency under liability requires only assessment of actual harm. However, liability also suffers from a disadvantage: incentives are diluted because injurers escape suit. Joint use of taxation and liability is examined, and it is shown that liability should be employed fully, with taxation taking up the slack due to escape from suit.

The public at large, many policymakers, and a number of economists hold views of social welfare that are non‐welfarist. That is, they attach some importance to factors other than the effects of policies on individuals’ utilities. We show, however, that any non‐welfarist method of policy assessment violates the Pareto principle.

Self-reporting --the reporting by parties of their own behavior to an enforcement authority --is a commonly observed aspect of law enforcement, as in the context of environmental and safety regulation. We add self-reporting to the model of the control of harmful externalities through probabilistic law enforcement. Optimal self-reporting schemes are characterized and are shown to offer two advantages over schemes without self-reporting: enforcement resources are saved because individuals who are led to report harmful acts need not be identified; risk is reduced because individuals bear certain sanctions when they report their behavior, rather than face uncertain sanctions.