A Note on the Optimality of Domain-specific Liability
- Resource Type
- research-article
- Authors
- Friehe, Tim; Langlais, Eric; Schulte, Elisabeth
- Source
- Review of Law & Economics. 18(2):283-295
- Subject
- liability
cumulative harm
product liability
environmental harm
K13
Q50
- Language
- English
- ISSN
- 1555-5879
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.