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S. Ambec and L. Ehlers. Regulation via the Polluter-Pays Principle. LERNA Working Paper No. 10.18.324, Dec 2010, 31 p.http://www2.toulouse.inra.fr/lerna/travaux/cahiers2010/10.18.324.pdfWe consider the problem of regulating an economy with environmental  pollution. We examine the distributional impact of the polluter-pays  principle which requires that any agent compensates all other agents for  the damages caused by his or her (pollution) emissions. With constant  marginal damages we show that regulation via the polluter-pays principle  leads to the unique welfare distribution that assigns non-negative  individual welfare and renders each agent responsible for his or her  pollution impact. We extend both the polluter-pays principle and this  result to increasing marginal damages due to pollution. We also discuss  the acceptability of the polluter-pays principle and compare it with the  Vickrey-Clark-Groves mechanism. (© authors)