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Risk, Liability, and Monopoly

Listed author(s):
  • James Boyd

The paper explores a monopolist's safety and output choices when there are potentially large-scale claims that can lead to firm insolvency. Analysis of a monopolized market yields different conclusions than models of rule choice where perfect competition or simple cost-minimization are assumed. The following are shown to be true when consumers do not internalize expected, uncompensated hazard costs: (1) potentially insolvent firms may make more efficient safety and output choices than fully capitalized firms and (2), for any level of capitalization, compliance with a negligence rule—where liabilities are removed—may in fact result in less output and safety than under strict liability, where hazard costs are at least partially internalized. When consumers fully discount risks, a negligence rule dominates strict liability because it allows for less costly, credible commitments to profit- and welfare-maximizing safety investments. The analysis demonstrates that the optimal legal system—including financial responsibility requirements—is particularly sensitive to market structure and the characteristics of firms' risk reduction technology

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Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

Volume (Year): 1 (1994)
Issue (Month): 3 ()
Pages: 387-403

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Handle: RePEc:taf:ijecbs:v:1:y:1994:i:3:p:387-403
DOI: 10.1080/758536229
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