Should environment be a concern for competition policy when firms face environmental liability?

In the recent period, more and more voices have called for unconventional competition policies as a way to achieve higher environmental investments from firms. This paper shows that this objective may come into conflict with those of environmental liability laws. We introduce a basic oligopoly model where firms produce a joint and indivisible environmental harm as a by-product of their output. We first analyze the effects on the equilibrium of alternative designs in environmental liability law, secondly, we discuss the rationale for “non-conventional” competition policies, i.e. more concerned with public interest such as the preservation of environment (as well as human health and so on). We study firms decisions of care and output under various liability regimes (strict liability vs negligence) associated with alternative damages apportionment rules (per capita vs market share rule), and in some cases with damages multipliers. We find that basing an environmental liability law on the combination of strict liability, the per capita rule, and an “optimal” damages multiplier, is consistent with a conservative competition policy, focused on consumers surplus, since, weakening firms’ market power also increases aggregate expenditures in environment preservation and social welfare. In contrast, a shift to the market share rule, or to a negligence regime, may be consistent with a restriction of competition, since firms’ entry may instead lead to a decrease in aggregate environmental expenditures and losses of social welfare. Nevertheless the fine tuning of the policy requires specific information from a Competition Authority, which we discuss as well.