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A Note on the Optimality of Domain-specific Liability

Author

Listed:
  • Friehe Tim
  • Schulte Elisabeth

    (Marburg Centre for Institutional Economics (MACIE), University of Marburg, Marburg, Germany)

  • Langlais Eric

    (EconomiX UMR 7235 CNRS & Paris Nanterre, 200 Avenue de la Republique, 92001 Nanterre cedex, Nanterre, France)

Abstract

This note analyzes the socially optimal allocation of liability when both consumers and the environment incur harm from the activity of a monopolistic firm. We show that the marginal welfare effect from a greater extent of loss shifting depends on the domain of harm (consumer vs. environment) and the relationship between the harm level and the level of output (proportional vs. non-proportional). Starting from the relevant benchmark of full compensation in both domains, reducing the firm’s liability for environmental harm is welfare-improving whereas reducing the firm’s liability for consumer harm is welfare-decreasing when harm increases more than proportionally with the quantity produced.

Suggested Citation

  • Friehe Tim & Schulte Elisabeth & Langlais Eric, 2022. "A Note on the Optimality of Domain-specific Liability," Review of Law & Economics, De Gruyter, vol. 18(2), pages 283-295, July.
    • Handle: RePEc:bpj:rlecon:v:18:y:2022:i:2:p:283-295:n:4
    DOI: 10.1515/rle-2022-0002
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    Keywords

    liability; cumulative harm; product liability; environmental harm;
    All these keywords.

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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