Internalizing environmental damages and endogenous reimbursement in environmental conflicts: a game-theoretic analysis

Environmental contest models typically make two standard assumptions, reimbursement rates and environmental damages are exogenously determined. Previous research that makes these assumptions conclude the equilibrium total effort level with reimbursement is greater than if reimbursement is disallowed. Assuming a regulator determines reimbursement rates and a firm controls environmental damages, this research finds different results, some counter to previous studies. A regulator can obtain reimbursement rates that minimize the social cost as the sum of environmental damage and abatement cost. In particular, we show that the reimbursement rates can induce the environmental conflicts to go to settlement. We also show that even if environmental conflicts go to trial, asymmetric reimbursement can reduce the total effort level caused by the conflicts as well as the total social cost as the sum of the social cost and the expected loss of the firm minus the expected payoff of the citizens’ group caused by the conflicts. © 2022, The Author(s), under exclusive licence to Springer-Verlag GmbH Germany, part of Springer Nature.