Socially optimal liability rules for firms with natural monopoly in contestable markets

This article considers the problem of socially efficient liability rules for firms in contestable markets where natural monopoly prevails due to decreasing average cost. If the fixed cost that pushes the entry-limiting price above marginal cost is large relative to the level of external harm of firms, the negligence regime is socially superior to the strict liability regime. In the opposite case, the strict liability rule may be socially superior.