Socially Optimal Liability Rules for Firms with Natural Monopoly

ISER Discussion Paper No. 753

11 Pages Posted: 1 Sep 2009

See all articles by Atsushi Tsuneki

Atsushi Tsuneki

Osaka University - Institute of Social and Economic Research (ISER)

Date Written: August 26, 2009

Abstract

It has been shown by Polinsky and Shavell that the strict liability rule is socially superior to the negligence liability rule when firms are injurers, strangers are victims, and accidents have a unilateral nature if prefect competition among firms prevails. This article considers the problem of socially efficient liability rules in a market where natural monopoly prevails due to decreasing average cost. We especially consider a quasi-competitive case where average cost pricing is achieved in a naturally monopolized market either through well-organized government regulation or the weak invisible hands of contestability. In contrast to the perfectly competitive economy, the present article shows that in most cases, the negligence regime is socially more desirable than the strict liability regime from the view point of economic efficiency.

Keywords: strict liability, negligence, natural monopoly, average cost pricing

JEL Classification: K13, K2

Suggested Citation

Tsuneki, Atsushi, Socially Optimal Liability Rules for Firms with Natural Monopoly (August 26, 2009). ISER Discussion Paper No. 753, Available at SSRN: https://ssrn.com/abstract=1462571 or http://dx.doi.org/10.2139/ssrn.1462571

Atsushi Tsuneki (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

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