Imperfect Competition and the Optimal Deterrence of Environmental Accidents

In settings with environmentally hazardous production, firms often operate in oligopoly or natural monopoly markets subject to both liability and negligence rules. We examine optimal deterrence under imperfect competition in settings with ex ante safety standards and ex post liability and negligence rules. We show that strict liability alone is sufficient to attain the social optimum in perfectly competitive markets contingent on firms remaining solvent after accidents. Under imperfect competition, we demonstrate that the joint use of liability rules and negligence rules involving both ex ante and ex post instruments is needed to attain the socially optimal resource allocation